Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms

53 Pages Posted: 19 Jun 2004 Last revised: 23 Aug 2010

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1991

Abstract

We present evidence on the cyclical behavior of small versus large manufacturing firms, and on the response of the two classes of firms to monetary policy. Our goal is to take a step toward quantifying the role of credit market imperfections in the business cycle and in the monetary transmission mechanism. We find that, following tight money, small firms sales decline at a faster pace than large firm sales for a period of more than two years. Further, bank lending to small firms contracts, while it actually rises for large firms. Monetary policy indicators tied to the performance of banking, such as M2, have relatively greater predictive power for small firms than for large. Finally, small firms are more sensitive than are large to lagged movements in GNP. Considering that small firms overall are a non-trivial component of the economy, we interpret these results as suggestive of the macroeconomic relevance of credit market imperfections.

Suggested Citation

Gertler, Mark and Gilchrist, Simon, Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms (November 1991). NBER Working Paper No. w3892. Available at SSRN: https://ssrn.com/abstract=319589

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Simon Gilchrist

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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