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Trade Credit, Bank Lending and Monetary Policy Transmission

  • Simona Mateut
  • Spiros Bougheas
  • Paul Mizen

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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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 05/01.

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Handle: RePEc:not:notcfc:05/01
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  22. 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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  27. Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
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