Title: Finance-thy-Neighbor. Trade Credit Origins of Aggregate Fluctuations (reischer_tcwp102919-main)

Abstract: This paper studies the role of endogenous trade-credit linkages for generating interdependent distortions and the propagation of shocks in a static quantitative multi- sector model where firms finance production using bank and trade credit. The adjustment in the volume and cost of trade credit in response to shocks to the cost of bank credit captures two counteracting mechanisms: (1) Firms smooth shocks by substituting bank and trade credit. (2) An increase in the cost of on trade credit amplifies financial shocks by tightening the financing condition of customers. In a quantitative application of the model to the US economy during the 2008-2009 crisis, simulations featuring only financial shocks show that: Trade-credit linkages generate large spillovers relative to an economy with bank finance only; The smoothing mechanism was operative, though small; Sectors extending relatively more trade credit to customers than their volume of bank loans are systemically important and generate large spillovers.