Credit Conditions and the Cyclical Behavior of Inventories

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981-1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974-1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s. This content downloaded from 91.229.229.157 on Tue, 10 Jun 2014 18:23:23 PM All use subject to JSTOR Terms and Conditions 566 Q UARTERLY JOURNAL OF ECONOMICSthat inventories are sensitive to financing conditions-finds scant support in most empirical work. This is our third stylized fact. As Blinder and Maccini [1991, p. 82] put it in their survey paper, "little influence of real interest rates on inventory investment can be found empirically." So where does this leave the simple "financial" account of the cyclical behavior of inventories? In our view, it would be premature to dismiss the theory. The failure of empirical models of inventories to find a significant role for financial variables may say more about the inadequacies of the specifications used in these models than about anything else.There are at least two reasons why standard specificationswhich typically use security market interest rates such as the commercial paper rate as explanatory variables-might do a poor job of capturing changes in "financial conditions," broadly defined. First, some borrowers may face quantity rationing constraints of the sort described by Stiglitz and Weiss [1981], Jaffee and Russell [1976], and others, and thus may be unable to obtain funds at the observed commercial paper rate. Second, some borrowers may be "bank-dependent" in the sense that they require external financing but do not have easy access to public debt markets. To the extent that there are important variations in the relative cost of bank loans versus commercial paper, the commercial paper rate may again be a poor measure of financing costs for these firms.Kashyap, Stein, and Wilcox [1993] (hereinafter KSW) present some aggregate time-series evidence on the relative costs of bank loans and commercial paper. KSW begin by constructing a quantity financing variable, the "mix," which they argue captures movements in bank loan supply. The mix is defined as the ratio of corporate bank borrowing to commercial ...

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

“…If firms are highly dependent on obtaining funds from banks with which they have a historical relationship, then the ability to finance foreign investments will depend, in part, on the financial condition of their bank. The consequences of the deterioration in the balance sheets of the financial intermediaries that provide credit to the firms, as well as the deterioration in the balance sheets of the firms themselves, are consistent with a large and growing literature on the importance of bank financing for firm investment (Fazzari, Hubbard, and Petersen 1988;Gertler and Gilchrist 1994;Kashyap, Stein, and Wilcox 1993;Kashyap, Lamont, and Stein 1994). While bankborrower relationships have been found to be important in the United States (Petersen and Rajan 1994), such links are likely to be even more important in a country that is far more reliant on bank financing, such as Japan.…”

Financing Constraints and Unemployment: Evidence from the Great Recession

“…Our paper also reinforces the conclusions in Gertler and Gilchrist (1994), who …nd that growth in sales, inventories, and bank debt of small manufacturing …rms is more sensitive to monetary policy shocks than that of larger …rms. Similarly, these …ndings are consistent with other studies that document the impact of credit constraints on investment spending (Fazzari, Hubbard, and Peterson 1988, Gertler and Hubbard 1988, Hoshi, Kashyap, and Scharfstein 1991, Whited 1992, Kashyap, Lamont, and Stein 1994, and Duchin, Ozbas, and Sensoy 2010 and employment (Sharpe 1994, Nickell and Nicolitsas 1999, Gozzi and Goetz 2010, Benmelech, Bergman, and Seru 2011, and Bascim, Baskaya, and Kilinc 2011. Methodologically, our paper di¤ers from the latter papers in that we di¤erentiate …rms by both size and external …nancial dependence.…”

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

“…Early theoretical work (Bernanke and Blinder (1988), Bernanke and Gertler (1989), Holmstrom and Tirole (1997), Stein (1998)) stresses the importance of credit market frictions for a funding shock to cause a credit supply contraction. While the first contributions to the empirical literature focused on time series (Bernanke and Blinder (1992), Bernanke (1983)) and cross-sectional analyses (Gertler and Gilchrist (1994), Kashyap et al (1994), Kashyap and Stein (2000), Ashcraft (2006)), in more recent work, researchers use within borrower estimation, sometimes together with quasi-exogenous liquidity shocks, to disentangle the effects of credit supply and credit demand (Khwaja and Mian (2008), Paravisini (2008), Schnabl (2012)). In line with the most recent literature, our specifications include firm fixed effects to control for borrower observed and unobserved heterogeneity.…”