Chain Reactions, Trade Credit and the Business Cycle
Firms in poor countries often tend to rely on alternative sources of financing different than banks. We show that borrowing constraints lead to financial arrangements between firms that can amplify the effect of liquidity or productivity shocks in the economy. In particular, we focus on the effects of trade credit. Widespread borrowing and lending between firms implies the establishment of relationships that can serve as a way to transmit economic shocks. In other words, trade credit creates a network of firms, all of them linked by the credit given to each other and all of them exposed to the temporary problems the others might have. We develop in this chapter a model based on the ideas of Kiyotaki and Moore (1997). Our model however, is a general equilibrium version of theirs that deals with the aggregate consequences that temporary productivity or liquidity shocks might have on the whole economy. Our results show that in a carefully calibrated model, the effects of these credit chains are quite important. In particular, in an economy like Mexico where 65% of firms claim their main source of financing to be other firms, the impact of productivity shocks is significant and three times bigger than in an economy with levels of trade credit use close to the US case
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Quintin, Erwan, 2008.
"Limited enforcement and the organization of production,"
Journal of Macroeconomics,
Elsevier, vol. 30(3), pages 1222-1245, September.
- Erwan Quintin, 2001. "Limited enforcement and the organization of production," Center for Latin America Working Papers 0601, Federal Reserve Bank of Dallas.
- Neumeyer, Pablo Andrés & Perri, Fabrizio, 2004.
"Business Cycles in Emerging Economies: The Role of Interest Rates,"
CEPR Discussion Papers
4482, C.E.P.R. Discussion Papers.
- Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
- Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business Cycles in Emerging Economies: The Role of Interest Rates," NBER Working Papers 10387, National Bureau of Economic Research, Inc.
- Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
- Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
- Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis.
- Prescott, Edward C., 1986.
"Theory ahead of business-cycle measurement,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 25(1), pages 11-44, January.
- Acemoglu, Daron & Scott, Andrew, 1997.
"Asymmetric business cycles: Theory and time-series evidence,"
Journal of Monetary Economics,
Elsevier, vol. 40(3), pages 501-533, December.
- Scott, A. & Acemoglu, D., 1995. "Asymmetric Business Cycles: Theory and Time-series Evidence," Economics Series Working Papers 99173, University of Oxford, Department of Economics.
- Raymond Fisman & Inessa Love, 2003.
"Trade Credit, Financial Intermediary Development, and Industry Growth,"
Journal of Finance,
American Finance Association, vol. 58(1), pages 353-374, 02.
- Fisman, Raymond & Love, Inessa, 2001. "Trade credit, financial intermediary development, and industry growth," Policy Research Working Paper Series 2695, The World Bank.
- Raymond Fisman & Inessa Love, 2002. "Trade Credit, Financial Intermediary Development and Industry Growth," NBER Working Papers 8960, National Bureau of Economic Research, Inc.
- Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank.
- Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
- Ellen R. McGrattan, 1998. "Application of weighted residual methods to dynamic economic models," Staff Report 232, Federal Reserve Bank of Minneapolis.
- Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:331. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.