Document Type
Article
Department
Economics
Publication Date
8-2018
Abstract
This paper examines the challenges firms (and policymakers) encounter when confronted by a recession at the zero lower bound, when traditional monetary policy is ineffective in the face of deteriorated balance sheets and high costs of credit. Within the larger body of literature, this paper focuses on the cost of credit during a recession, which constrains smaller firms from borrowing and investing, thus magnifying the contraction. Extending and revising a model originally developed by Walker (2010) and estimated by Pandey and Ramirez (2012), this study uses a Vector Error Correction Model with structural breaks to analyze the effects of relevant economic and financial factors on the cost of credit intermediation for small and large firms. Specifically, it tests whether large firms have advantageous access to credit, especially during recessions. The findings suggest that during the Great Recession of 2007-09 the cost of credit rose for small firms while it decreased for large firms, ceteris paribus. From the results, the paper assesses alternative ways in which the central bank can respond to a recession facing the zero lower bound.
Publication Title
Research in Applied Economics
Volume
10
Issue
3
First Page
1
Last Page
23
DOI
10.5296/rae.v10i3.13476
Comments
Published under Open Access terms as:
Louisa Kemmerer and Miguel D. Ramirez. “Did Smaller Firms Face Higher Costs of Credit during the Great Recession: A Vector Error Correction Analysis with Structural Breaks.” Research in Applied Economics 10, no. 3 (2018): 1-23.