Trade Credit and Monetary Policy in the UK: An Empirical Investigation
38 Pages Posted: 28 Feb 2005
Date Written: December 2004
The credit channel of monetary transmission suggests that monetary tightening results in a contraction of the supply of credit to firms who borrow via financial intermediaries. However, according to Meltzer (1960), the existence of an inter-firm credit flow appears to favour those firms most affected by credit rationing. This study re-analyzes Meltzer's hypothesis using UK data. The results of the analysis shows that indeed there is an increase in trade credit flows in period of rising interest rates, but the magnitude is not very significant overall. Firms of different financial status, however, behave differently. The novel finding is that small firms extend trade credit more aggressively than medium and large firms. This behaviour occurs even in those firms in financial distress. Interestingly, this behaviour may be one of the reasons that cause small firms that cannot receive trade credit from their suppliers in period of monetary contraction, to go bankrupt.
Keywords: Trade Credit, Monetary Policy, Meltzer's redistribution hypothesis
JEL Classification: G3, L2
Suggested Citation: Suggested Citation