Trade Credit and Sectoral Comovement during the Great Recession

Jorge Miranda-Pinto and Gang Zhang ()
Authors registered in the RePEc Author Service: Benoit Julien and Ian King

No 4620, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

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%.

Keywords: Sectoral Comovement; Production Network; Trade Credit; Financial Friction (search for similar items in EconPapers)
JEL-codes: C67 E23 E32 E44 E51 F40 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uqmrg6:46

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