Description

We show that sectoral comovement did not change for any post-war US recession, with the only exception of the Great Recession. Using sector-level and firm-level data, we argue that this large increase was driven mainly by the endogenous response of firm-to-firm credit (trade credit). We then develop a multisector model with inputoutput linkages, financial frictions, and endogenous supply of trade credit and show that the financial shocks after Lehman Brothers’ collapse triggered a response of trade credit that can qualitatively and quantitatively account for the large shift in comove-ment. A model with fixed trade-credit, subject to the same productivity and financial shocks, generates no increase in comovement and implies a 20% smaller decline in GDP than in the endogenous case. In contrast, we show that trade credit in the other previous recessions acted as a cushion that mitigated negative sectoral spillovers.