Financial and liquidity constraints: reinforcing the financial accelerator mechanism

This paper examines the effects that the need of holding unproductive working capital has on the capital and employment levels of the firm. The existance of cash-flow restrictions on the use of capital, which materilizaes in the balance sheet in the form of certain nonproductive assets such as currency and deposits, accounts receivable, proves to be of great importance to understand firm's behaviour. In the proposed theoretical model it is verified that this financial requirement modifies the firm's optimal decisions in two fundamental aspects. First, this restriction alters the optimal decision over liquids assets investment and employmnet levels. The second refers to the effects caused by the necessity of maintaining a set of financial resources in nonproductive assets, detracting some of the available resources from other more profitable investment decisions.