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Trade Credit and Sectoral Comovement during the Great Recession

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Abstract

We show that, unlike any other recession after World War II, sectoral output comovement significantly increased during the Great Recession. On the other hand, trade credit supply, as measured by the ratio of account receivables to the total value of outputs, collapsed during the Great Recession. We show that sectoral comovement was larger for sectors connected through trade credit. We then develop a multisector model with occasionally binding credit constraints and endogenous supply of trade credit to explain these facts. The model shows that equilibrium trade credit reflects both the intermediate supplier’s and client’s bank lending conditions, and thus has asymmetric effects on sectoral outputs. When banking shocks are idiosyncratic, trade credit serves as a mitigation mechanism as firms are able to substitute bank loans for trade credit. However, when banking shocks are strongly correlated, trade credit amplifies the negative financial shock and generates the sharp increase in sectoral comovement observed during the Great Recession. We show that production network models with reduced form wedges are unable to generate this pattern, and that a model with endogenous trade credit amplifies the Great Recession in 18%.

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  • Jorge Miranda-Pinto & Gang Zhang, "undated". "Trade Credit and Sectoral Comovement during the Great Recession," MRG Discussion Paper Series 4721, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uqmrg6:47
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    File URL: http://www.uq.edu.au/economics/mrg/4721.pdf
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    1. Trade Credit and Sectoral Comovement during the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2021-05-26 23:17:01

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    More about this item

    Keywords

    Sectoral Comovement; Production Network; Trade Credit; Financial Friction;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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