Trade Credit and Monetary Policy in the UK: An Empirical Investigation

38 Pages Posted: 28 Feb 2005

See all articles by Nick Wilson

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School

Tung Le

Independent

Paul

Independent

Date Written: December 2004

Abstract

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

Wilson, Nicholas and Le, Tung Duc and Wetherhill, Paul, Trade Credit and Monetary Policy in the UK: An Empirical Investigation (December 2004). Available at SSRN: https://ssrn.com/abstract=675630 or http://dx.doi.org/10.2139/ssrn.675630

Nicholas Wilson

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Paul Wetherhill

Independent

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