Events

Dr. Gang Zhang
Assistant Professor
Cheung Kong Graduate School of Business

We show that sectoral comovement of output growth significantly rose during the Great Recession, but not in any other US recession after WWII. The rise during 2008-2009 was mainly driven by pairs of input-trading sectors or firms that experienced contractions in trade credit. We then build a multisector model with the endogenous supply of trade credit and show that trade credit responds little to productivity shocks but strongly to financial ones and further generates asymmetric effects on the economy. When a negative financial shock hits an input client, if the supplier is more financially constrained than the client, trade credit provision declines, increases their comovement, and amplifies the decline in outputs. Otherwise, trade credit mitigates the shock’s propagation. Our model can account for the unique rise in comovement during the Great Recession in the presence of modestly correlated financial shocks that triggered trade credit as an amplifier. In contrast, the model implies that trade credit during the early 1980s recession was adjusted to mitigate the spillover effects of weakly correlated financial (productivity) shocks. During the COVID pandemic, sectors ubiquitously comoved more due to a sharp decline in aggregate productivity, but the rise in comovement vanishes after controlling for aggregate GDP.