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Trade credit, bank lending and monetary policy transmission

Listed author(s):
  • Mateut, Simona
  • Bougheas, Spiros
  • Mizen, Paul

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow firms to access only financial markets or bank lending according to some net worth criterion. In our model we consider external finance from trade credit as an additional source of funding for firms that cannot obtain credit from banks. We predict that when monetary policy tightens there will be a reduction in bank lending relative to trade credit. This is confirmed with an empirical investigation of 16,000 UK manufacturing firms.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 3 (April)
Pages: 603-629

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:3:p:603-629
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  18. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  19. Atanasova, Christina V. & Wilson, Nicholas, 2004. "Disequilibrium in the UK corporate loan market," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 595-614, March.
  20. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  21. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521008051, December.
  22. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, 06.
  23. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
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  25. Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
  26. Emery, Gary W., 1984. "A Pure Financial Explanation for Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 271-285, September.
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