Trade Credit and Sectoral Comovement during Recessions

Jorge Miranda-Pinto and Gang Zhang

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We show that sectoral comovement did not change for any post-war US recession, with the only exception of the Great Recession. Using sector-level and firm-level data, we argue that this large increase was driven mainly by the endogenous response of firm-to-firm credit (trade credit). We then develop a multisector model with inputoutput linkages, financial frictions, and endogenous supply of trade credit and show that the financial shocks after Lehman Brothers’ collapse triggered a response of trade credit that can qualitatively and quantitatively account for the large shift in comovement. A model with fixed trade-credit, subject to the same productivity and financial shocks, generates no increase in comovement and implies a 20% smaller decline in GDP than in the endogenous case. In contrast, we show that trade credit in the other previous recessions acted as a cushion that mitigated negative sectoral spillovers.

Date: 2022-08
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-his and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:961

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