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Why has the nonfinancial commercial paper market shrunk recently?


  • Pu Shen


The total volume of nonfinancial commercial paper outstanding peaked in the fall of 2000 and has declined rapidly ever since. By September 2002, the market had shrunk more than 50 percent. Relative to historical patterns, both the magnitude and the timing of the decline are unusual. The decline is the largest on record, and the market started to shrink before the recent recession began. In the past, the volume of commercial paper outstanding tended to increase during the early stages of recessions. ; Commercial paper is an important source of external funding for corporate borrowers and has become increasingly popular over the years. Despite a recent dramatic decline, the volume of commercial paper outstanding in September 2002 was still about one-sixth of bank commercial and industrial loans. ; Shen investigates the factors contributing to the dramatic decline in the commercial paper market and assesses whether the recent shrinkage is likely to continue. She begins by documenting the recent sharp decline in the volume of nonfinancial commercial paper outstanding and contrasts this development with historical experience. Next, she considers the factors that may have reduced the supply of credit in the commercial paper market and discusses the factors that may have reduced the demand. She concludes that declines in both supply and demand have contributed to the shrinkage of the market. Looking forward, although the demand factors are waning, the supply factors are likely to persist in the near term and keep the commercial paper market under pressure.

Suggested Citation

  • Pu Shen, 2003. "Why has the nonfinancial commercial paper market shrunk recently?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 55-76.
  • Handle: RePEc:fip:fedker:y:2003:i:qi:p:55-76:n:v.88no.1

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    References listed on IDEAS

    1. Crabbe, Leland & Post, Mitchell A, 1994. " The Effect of a Rating Downgrade on Outstanding Commercial Paper," Journal of Finance, American Finance Association, vol. 49(1), pages 39-56, March.
    2. Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
    3. Thomas K. Hahn, 1993. "Commercial paper," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67.
    4. Carol L. Osler & Gijoon Hong, 2000. "Rapidly rising corporate debt: are firms now vulnerable to an economic slowdown?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jun).
    5. Charles W. Calomiris, 1994. "Is the discount window necessary? a Penn Central perspective," Review, Federal Reserve Bank of St. Louis, issue May, pages 31-55.
    6. Drew B. Winters, 2002. "Commercial paper: a colossal market," National Economic Trends, Federal Reserve Bank of St. Louis, issue Oct.
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    1. Nippani, Srinivas & Shwiff, Steven S. & Arize, Augustine C., 2009. "A note on inventories and commercial paper yields," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 711-719, May.

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