Credit Channel of Monetary Transmission: the Role of Industrial Interenterprise Arrears
This project addresses the channels through which monetary policy may have produced the decline of output in Russia. In particular, it considers the role of interenterprise arrears in the transmission process, as well as the question of whether monetary impulses affected the sectoral pattern of the industrial recession. It appears that the fall in output related to monetary contraction may be significant, given the deficiencies of the credit market. Furthermore, it appears that distortions associated with the policy (which resulted in the outburst of quasi-money and extremely high interest rates) may have lengthened the recession. On the supply side, the structural weakness of the banking system results in a lack of adequate substitutes for Central Bank of Russia (CBR) loans. This intensifies the decline of credit supply in periods of monetary tightening. On the demand side, the lack of substitutes for bank credit deepens enterprise-side reaction, adversely affecting the viability of firms in the long-run. The model explains the transactions’ role of money and reveals that interenterprise arrears may soften or strengthen production-side responses to a monetary impulse in the steady state (compared with the case when no arrears are allowed). Empirical evidence appears to favor the “cushioning” effect of arrears.
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