Trade Credit and the Transmission of Unconventional Monetary Policy

Manuel Adelino,Pedro M Pires,Miguel Almeida Ferreira,Mariassunta Giannetti

doi:10.2139/ssrn.3544697

Abstract

We show that trade credit in production networks is important for the transmission of unconventional monetary policy. We find that firms with bonds eligible for purchase under the European Central Bank's Corporate Sector Purchase Program act as financial intermediaries and extend more trade credit to their customers. The increase in trade credit flows is more pronounced from core countries to periphery countries and towards financially constrained customers. Customers increase investment and employment in response to the additional financing, while suppliers with eligible bonds increase their customer base, potentially favoring upstream industry concentration. Our findings suggest that the trade credit channel of monetary policy produces heterogeneous effects on regions, industries, and firms.

Highlights

Conventional monetary policy is typically thought to affect access to external finance more for small firms than for large firms
Unconventional monetary policy tools, which involve directly purchasing assets in public debt markets, can directly affect bond yields and issuance volumes of large firms, as these firms are much more likely to issue bonds. This has been the case for both episodes of quantitative easing in the United States focusing on short-and long-term Treasury bills (Foley-Fisher, Ramcharan and Yu, 2016), and for the European Central Bank’s (ECB) Corporate Sector Purchase Program (CSPP) that involve the purchase of investment grade corporate bonds (Grosse-Rueschkamp, Steffen, and Streitz, 2019; Todorov, 2020)
We find that eligible firms increase the amount of trade credit they provide to customers more than non-eligible firms after the CSPP

Summary

Introduction

Conventional monetary policy is typically thought to affect access to external finance more for small firms than for large firms. Unconventional monetary policy tools, which involve directly purchasing assets in public debt markets, can directly affect bond yields and issuance volumes of large firms, as these firms are much more likely to issue bonds. This has been the case for both episodes of quantitative easing in the United States focusing on short-and long-term Treasury bills (Foley-Fisher, Ramcharan and Yu, 2016), and for the European Central Bank’s (ECB) Corporate Sector Purchase Program (CSPP) that involve the purchase of investment grade corporate bonds (Grosse-Rueschkamp, Steffen, and Streitz, 2019; Todorov, 2020). Quantitative easing can indirectly benefit small firms in the economy through the bank lending channel (Acharya, Eisert, Eufinger, and Hirsch, 2018; Grosse-Rueschkamp, Steffen, and Streitz, 2019; Chakraborty, Goldstein, and Mackinlay, 2020)

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Conclusion