Credit Chain and Sectoral Co-movement: A Multi-Region Investigation

Abstract

This paper empirically examines how sectoral co-movement are correlated with trade credit usage in a multi-region setting. Extending the models in Shea (2002) and Raddatz (2010), we develop a framework that captures the impact of trade credit usage on co-movement between sectors within a country and cross countries separately. Using the Multi-Regional Input-Output Table developed by Asian Development bank, we assemble a dataset consisting of 14 manufacturing industries for 53 economies. We provide empirical evidence that trade credit linkage is an influential channel for both the domestic and cross-border shocks to propagate and to create a more profound impact in industries around the globe. We find the impact of domestic credit chain on sectoral co-movement is twice as strong as the international ones. We further examine the time trend of this relationship, and find that from 2000 to 2018, the positive relationship between the intensity of trade credit usage and sectoral correlation decreases. We posit that this could be due to a more diversified global trade pattern changes during these two decades.

Keywords: trade credit, credit chain, sectoral co-movement, Input-Output Table, systemic risk