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Monetary Policy Tightening and SME Bank-Credit Demand Substitution

Author

Listed:
  • Supriya Kapoor

    (Trinity Business School, Trinity College Dublin)

  • Michael Mahony

    (Macro-Finance Division, Central Bank of Ireland)

  • Anuj Pratap Singh

    (Macro-Finance Division, Central Bank of Ireland)

Abstract

Since July 2022, European Central Bank (ECB) increased its interest rates for the first time in eleven years to bring inflation back to target. This has huge implication on the credit decision for firms, especially the small and medium enterprises (SME), instrumental in supporting employment, innovation and income. Using ECB's `Survey on Access to Finance of Enterprises' (SAFE) from 2015 to 2023, this paper assesses if the ECB's monetary policy tightening bears any relationship with SME's substituting away from bank credit towards alternative sources of finance. Our results show that contractionary monetary policy shocks were positively associated with the likelihood of SME's substituting away from bank credit. We find this behaviour across SMEs with larger turnover, employee size, age, as well as credit-quality; indicating a much stronger reliance and stickiness to bank credit for relatively smaller, younger, and riskier firms despite increases in the cost of credit following contractionary monetary policy shocks.

Suggested Citation

  • Supriya Kapoor & Michael Mahony & Anuj Pratap Singh, 2025. "Monetary Policy Tightening and SME Bank-Credit Demand Substitution," Trinity Economics Papers tep0125, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0125
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    References listed on IDEAS

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    More about this item

    Keywords

    European Central Bank (ECB); monetary policy tightening; SME credit demand; firm bank credit substitution; firm financing behaviour and adaptability;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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