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Monetary Policy Shocks and Trade Credit: An Empirical Analysis Using Firm-level Data

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  • Farooq Ahmad
  • Abdul Rashid
  • Anwar Shah

Abstract

This study explores the presence of the trade credit channel and tests the validity of the pecking order theory (POT) and the market power theory (MPT) of firm capital structure utilizing a dataset of 400 listed non-financial firms in Pakistan. This study further analyses the role of GDP growth (GDPG) and financial sector development (FSD) in establishing the effect of monetary policy (MP) shocks on trade credit demand (TCD). The empirical findings of our extended model incorporating the POT and MPT reveal the positive, significant effect of MP shocks on TCD, indicating that firms substitute trade credit with bank credit during episodes of increased MP shocks. Furthermore, the results show that GDPG strengthens MP shocks’ effect on TCD. Finally, the results show that in periods of higher MP shocks, enhanced FSD significantly facilitates firms to obtain external borrowing, which reduces the positive effect of MP shocks on TCD.

Suggested Citation

  • Farooq Ahmad & Abdul Rashid & Anwar Shah, 2026. "Monetary Policy Shocks and Trade Credit: An Empirical Analysis Using Firm-level Data," Journal of South Asian Development, , vol. 21(1), pages 31-61, April.
    • Handle: RePEc:sae:soudev:v:21:y:2026:i:1:p:31-61
    DOI: 10.1177/09731741261449526
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