Year of Publication

2018

Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation

College

Business and Economics

Department

Economics

First Advisor

Dr. Ana María Herrera

Abstract

Historically, credit market conditions have been shown to impact economic activity, at times severely. For instance, in the late 2000s, the United States experienced a financial crisis that seized domestic and foreign credit markets. The ensuing lack of access to credit brought about a steep decline in output and a sluggish recovery. Accordingly, policymakers commonly take steps to mitigate the effects of adverse credit market conditions and, at times, conduct unconventional monetary policy once traditional policy tools become ineffective. This dissertation is a collection of essays regarding monetary policy, the flow of credit, financial crises, and the macroeconomy. Specifically, I describe monetary policy’s impact on the allocation of credit in the U.S. and analyze the role of upstream and downstream credit conditions and financial crises on international trade in a global supply chain.

The first chapter assesses the impact of monetary policy shocks on credit reallocation and evaluates the importance of theoretical transmission mechanisms. Compustat data covering 1974 through 2017 is used to compute quarterly measures of credit flows. I find that expansionary monetary policy is associated with positive long-term credit creation and credit reallocation. These impacts are larger for long-term credit and for credit of financially constrained firms and firms that are perceived as risky to the lender. This is predicted by the balance sheet channel of monetary policy and mechanisms that reduce lenders’ risk perceptions and increase the tendency to search for yield. Furthermore, I find that, on average, the largest increases in credit creation resulting from monetary expansion are to firms that exhibit relatively low investment efficiency. These estimation results suggest that expansionary monetary policy may have a negative impact on future economic growth.

The second chapter evaluates the quantitative effects of unconventional monetary policy in the late 2000s and early 2010s. This was a period when the traditional monetary policy tool (the federal funds rate) was constrained by the zero lower bound. We compute credit flow measures using Compustat data, and we employ a factor augmented vector autoregression to analyze unconventional monetary policy’s impact on the allocation of credit during the zero lower bound period. By employing policy counterfactuals, we find that unconventional monetary policy has a positive and simultaneous impact on credit creation and credit destruction and these impacts are larger in long-term credit markets. Applying this technique to analyze the flows of financially constrained and non-financially constrained borrowing firms, we find that unconventional monetary policy operates through the easing of collateral constraints because these effects are larger for small firms or those with high default probabilities. During the zero lower bound period, we also find that unconventional monetary policy brings about increases in credit creation for firms of relatively high investment efficiency.

The third chapter pertains to the global trade collapse of the late 2000s. This collapse was due, in part, to strained credit markets and the vulnerability of exporters to adverse credit market conditions. The chapter evaluates the impact of upstream and downstream credit conditions and the differential effects of financial crises on bilateral trade. I find that upstream and downstream sectors’ needs for external financing is negatively associated with trade flows when the exporting or importing country’s cost of credit is high. However, I find that this effect is dampened for downstream sectors. I also find that downstream sectors’ value of collateral is positively associated with trade when the cost of credit is high in the importing country. High downstream trade credit dependence coupled with high costs of credit in the importing country also cause declines in imports. There are amplifying effects of credit costs for sectors that are highly dependent on external financing when the importing or exporting country is in financial crisis. Further, the magnitude is larger when the exporting country is in financial crisis. Finally, I find that these effects on trade flows are large when the exporting country is a developed economy, but they are muted for developing economies.

Digital Object Identifier (DOI)

https://doi.org/10.13023/etd.2018.338

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