This paper studies the macroeconomic implications of corporate cash holdings over the business cycle. Developing a heterogeneous-firm business-cycle model with precautionary savings, we show that firm-level nonlinear cash holdings drive state dependence in aggregate real dynamics. Specifically, low corporate liquidity triggers sharp dividend cuts, doubling the consumption drop in response to adverse productivity shocks relative to liquid periods. We identify the corporate marginal propensity to pay out (MPPO) as a crucial determinant of fiscal policy effectiveness during downturns: subsidies to firms stimulate output most effectively when firms are liquid with low MPPO. Despite this stabilizing role, we find that equilibrium cash holdings are inefficiently high due to a negative pecuniary externality.
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