Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms

We analyze the response of small versus large manufacturing firms to monetary policy. The goal is to obtain evidence on the importance of financial propagation mechanisms for aggregate activity. We find that small firms account for a significantly disproportionate share of the manufacturing decline...

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Bibliographic Details
Published in:The Quarterly journal of economics 1994-05, Vol.109 (2), p.309-340
Main Authors: Gertler, Mark, Gilchrist, Simon
Format: Article
Language:English
Subjects:
Balance sheets
Bank loans
Business cycles
Business structures
Economic aspects
Economic conditions
Economic fluctuations
Economic growth rate
Economic impact
Inventories
Manufacturers
Manufacturing
Manufacturing industry
Monetary policy
Sales growth
Short sales
Short term debt
Small business
Studies
Citations: Items that cite this one
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Summary:We analyze the response of small versus large manufacturing firms to monetary policy. The goal is to obtain evidence on the importance of financial propagation mechanisms for aggregate activity. We find that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy. They play a surprisingly prominent role in the slowdown of inventory demand. Large firms initially borrow to accumulate inventories. After a brief period, small firms quickly shed inventories. We attempt to sort financial from nonfinancial explanations with evidence on asymmetries and on balance sheet effects on inventory demand across size classes.
ISSN:0033-5533
1531-4650
DOI:10.2307/2118465