Did Smaller Firms face Higher Costs of Credit during the Great Recession? A Vector Error Correction Analysis with Structural Breaks

Louisa Kammerer and Miguel Ramirez

No 1707, Working Papers from Trinity College, Department of Economics

Abstract: This paper examines the challenges firms(and policymakers) encounter when confronted by a recession at the zero lower bound, when traditional monetary policy is ineffective in the face of deteriorated balance sheets and high costs of credit. Within the larger body of literature, this paper focuses on the cost of credit during a recession, which constrains smaller firms from borrowing and investing, thus magnifying the contraction. Extending and revising a model originally developed by Walker (2010) and estimated by Pandey and Ramirez (2012), this study uses a Vector Error Correction Model with structural breaks to analyze the effects of relevant economic and financial factors on the cost of credit intermediation for small and large firms. Specifically, it tests whether large firms have advantageous access to credit, especially during recessions. The findings suggest that during the Great Recession of 2007-09 the cost of credit rose for small firms while it decreased for large firms, ceteris paribus. From the results, the paper assesses alternative ways in which the central bank can respond to a recession facing the zero lower bound.

Keywords: Cost of credit; General impulse response functions; Granger causality test; Great Recession; Gregory Hansen single-break cointegration test; Johansen cointegration test; KPSS unit root test; Monetary policy; Vector error correction model (VECM); Small and large firms; and Zero lower bound (ZLB). (search for similar items in EconPapers)
JEL-codes: C22 E50 G01 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-05, Revised 2018-06
New Economics Papers: this item is included in nep-ban, nep-ets and nep-mac
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http://www3.trincoll.edu/repec/WorkingPapers2017/WP17-07.pdf First version,2018 (application/pdf)

Related works:
Journal Article: Did Smaller Firms Face Higher Costs of Credit During the Great Recession? A Vector Error Correction Analysis with Structural Breaks (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1707

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