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Bank borrowing constraints and the demand for trade credit: evidence from panel data
Author(s) -
Atanasova Christina V.,
Wilson Nicholas
Publication year - 2003
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1134
Subject(s) - credit rationing , collateral , trade credit , economics , monetary economics , credit history , credit channel , credit crunch , monetary policy , credit reference , credit card interest , installment credit , financial system , finance , interest rate , credit risk , inflation targeting
Monetary policy contractions exacerbate credit constraints stemming from asymmetric information, incentive problems and limited collateral. During such periods financial intermediaries reduce the supply of credit to smaller businesses. Although trade credit is a less desirable alternative of corporate financing, it may play a special role in alleviating credit rationing. This paper is an empirical investigation of the interaction of monetary policy, credit market conditions and corporate financing over the business cycle. It provides a simple test of the existence of a credit channel of monetary policy transmissions. Using individual firm data we find that during periods of tight money the proportion of bank‐borrowing constrained firms increases. Borrowing constrained films are found to substitute away from bank credit to trade credit. Such evidence supports the existence of a credit channel of monetary policy transmission: firms do not voluntarily cut bank loans (e.g. because of demand slowdown) since they increase their demand for a less desirable alternative (trade credit). Copyright © 2003 John Wiley & Sons, Ltd.