Determinants of Aggregate Credit Flows to U.S. Corporate and Noncorporate Sector

P. Lakshmi,Nikhil Varaiya,M. Thenmozhi

doi:10.1177/2158244018823082

P. Lakshmi, Nikhil Varaiya + Show 1 more

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https://doi.org/10.1177/2158244018823082

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Abstract

This article explores the financial accounts of the United States to analyze the synchronicity in bank and nonbank credit flows with the fund flow patterns of U.S. nonfinancial corporate and noncorporate sector. We differ from prior studies and examine the long-term behavior from 1952 to 2015 in relation to peaks and troughs in business cycle, sector-specific factors, and macroeconomic variations. We find that the nonbank credit flows have evolved as a significant source of credit for corporate and noncorporate sector and exhibit higher levels of synchronicity during the period after 1980. The high synchronicity of nonbank credit flows necessitates sufficient resilience in the business cycle upsurge through countercyclical actions, specifically in the noncorporate sector. Multivariate regression results reveal that noncorporate sector relies more on nonbank credit for short-term cash and working capital requirements, whereas corporate sector opts nonbank credit for long-term investments. We also find evidence of relatively higher inter-sectoral impact of business cycle shocks between corporate and noncorporate sector from 1980 to 2015.

Highlights

The U.S financial crisis of 2007-2009 and the European financial crisis of 2007 are underpinned by a lack of understanding of the financial system and its linkage with the broader economy (Veron, 2013)
Recent Federal Reserve flow of funds data release reveal that the share of U.S nonfarm, nonfinancial noncorporate business contributed a greater part of the U.S gross domestic product (GDP) in 2015 than in any year since 1970 and the gross value added by noncorporate business to GDP is 18.63%
On examining the leverage, the ratio of U.S corporate debt to GDP stands at 40% at the end of 2015 Quarter 4 (Q4), whereas for noncorporate business it has soared to more than 18% from 3% in 1945 (Figure 3)

Summary

Introduction

The U.S financial crisis of 2007-2009 and the European financial crisis of 2007 are underpinned by a lack of understanding of the financial system and its linkage with the broader economy (Veron, 2013). This has raised alarms across all the sectors of the global economy, which is evident through wide-ranging reforms in financial and nonfinancial sectors. The focus of the present study is to explore empirically at the aggregate level, the changing aspects of bank and nonbank credit flows and a comparison of its synchronicity with the usage of funds by the U.S noncorporate and corporate business sectors as separate entities. We make an effort to understand whether financial shocks from the corporate businesses act as mechanisms inducing or amplifying fund flow patterns in the noncorporate sector

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