Elasticity of money in production networks, working capital, credit lines and financial conditions

Ryan Niladri Banerjee, Hyun Song Shin and Jose Maria Vidal Pastor

No 1350, BIS Working Papers from Bank for International Settlements

Abstract: The elastic supply of money through overdrafts and credit lines overcomes cash-in-advance con straints, enabling large-value payments without waiting for incoming cash. This elasticity is crucial in long supply chains, where cash-in-advance constraints could otherwise cause gridlock. In essence, money elasticity and the supply of working capital are two sides of the same coin, with undrawn credit lines serving as the operative link. This paper examines how shifts in financial conditions influence money elasticity and, in turn, impact firm activity within produc tion networks. Using granular firm-level data, we demonstrate that production-network-driven working capital needs introduce a cyclical element that dances to the tune of financial conditions. Tighter conditions, such as rising credit spreads or a stronger US dollar, significantly reduce output, with spillovers through production networks amplifying the effects. These findings underscore the importance of money elasticity in supporting economic stability.

Keywords: money elasticity; working capital; credit lines; financial conditions; input-output linkages (search for similar items in EconPapers)
JEL-codes: E23 E32 E41 E44 E51 F65 (search for similar items in EconPapers)
Date: 2026-05
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