We study how corporate liquidity shapes business-cycle fluctuations. In a heterogeneous firm model, nonlinear cash policies generate state-dependent dynamics: low liquidity induces sharp payout cuts and nearly triples the consumption decline following adverse productivity shocks relative to median-liquidity periods. The strength of this transmission is governed by the marginal propensity to pay out (MPPO), the share of an additional dollar of liquidity distributed to households. The same statistic governs fiscal transmission: tax-financed transfers raise output most when liquid firms retain them. Using policy-induced liquidity shocks from net operating loss carryback reforms, we estimate its cross-firm profile, which the model matches.
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