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Finance-thy-Neighbor. Trade Credit Origins of Aggregate Fluctuations

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  • Margit Reischer

    (Cambridge University)

Abstract

Trade credit in the form of a delay of inputs payments is an important source of financing for all types of firms. In this paper, I study the role of credit linkages for the propagation of financial shocks in a production network where firms finance their working capital requirements using bank and trade credit. To this end, I build a quantitative multisector model with endogenous credit linkages between representative firms in each sector. The endogenous adjustment in the volume and cost of trade credit captures two counteracting mechanisms: (1) Firms smooth interest rate shocks by substituting bank and supplier finance. (2) An increase in the interest rate that a firm charges on trade credit tightens the financing terms of its customers thereby amplifying financial shocks. Quantitatively, the model accounts for 30% of the variation in aggregate output in the US-economy. Model simulations show that the existence of the trade credit network doubled the drop in aggregate output during the 2008-2009 crisis relative to an equivalent economy with bank-finance only. Furthermore, the ratio of total outstanding payments owed by customers for already delivered goods and services to bank credit is a good proxy for the systemic importance of a sector in propagating liquidity shocks.

Suggested Citation

  • Margit Reischer, 2019. "Finance-thy-Neighbor. Trade Credit Origins of Aggregate Fluctuations," 2019 Meeting Papers 1129, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1129
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    Cited by:

    1. Altinoglu, Levent, 2021. "The origins of aggregate fluctuations in a credit network economy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 316-334.
    2. Xavier Mateos-Planas & Giulio Seccia, 2021. "Trade Credit Default," Discussion Papers 2125, Centre for Macroeconomics (CFM).
    3. Basile Grassi & Julien Sauvagnat, 2019. "Production networks and economic policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 35(4), pages 638-677.
    4. Esposito, Federico & Hassan, Fadi, 2023. "Import competition, trade credit and financial frictions in general equilibrium," LSE Research Online Documents on Economics 121378, London School of Economics and Political Science, LSE Library.
    5. Banu Demir & Beata Javorcik & Tomasz K. Michalski & Evren Ors, 2024. "Financial Constraints and Propagation of Shocks in Production Networks," The Review of Economics and Statistics, MIT Press, vol. 106(2), pages 437-454, March.
    6. Yoshiyuki ARATA, 2020. "The Role of Granularity in the Variance and Tail Probability of Aggregate Output," Discussion papers 20027, Research Institute of Economy, Trade and Industry (RIETI).
    7. Esposito, Federico & Hassan, Fadi, 2023. "Import Competition, Trade Credit, and Financial Frictions in General Equilibrium," CEPR Discussion Papers 17926, C.E.P.R. Discussion Papers.
    8. Adilkhanova, Zarina & Nurlankul, Aruzhan & Token, Aizat & Yavuzoglu, Berk, 2022. "Trade credit and financial crises in Kazakhstan," Journal of Asian Economics, Elsevier, vol. 80(C).
    9. Thiago Christiano Silva & Carlos Eduardo de Almeida & Solange Maria Guerra & Benjamin Miranda Tabak, 2024. "COVID-19 and Credit Reallocation: evidence from bank branch lending in Brazil," Working Papers Series 601, Central Bank of Brazil, Research Department.

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