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October 2010, EB10-10

Economic Brief

The Responses of Small and Large Firms to Tight
Credit Shocks: The Case of 2008 through the Lens
of Gertler and Gilchrist (1994)
By Marianna Kudlyak, David A. Price, and Juan M. Sánchez

Do large firms and small firms behave differently when credit becomes more
costly or harder to obtain? Past research has found that small firms are more
likely to be credit-constrained and thus tend to be affected more negatively
than large firms during such times. Recent findings from the 2007–2009
recession, however, raise questions about the roles of small and large firms
during periods of tight credit.
A widespread view in macroeconomics holds that
the effects of tight credit serve as a transmission
belt that turns shocks in financial markets into
shocks in the “real” economy. Adverse conditions
for firms in credit markets curtail the economic activity of those firms, and thereby cause economic
shocks in financial markets to be amplified into
real-world shocks affecting sales, inventories, and,
ultimately, employment. Such conditions in credit
markets may arise from contractionary monetary
policy or from other events making credit costlier
or less accessible. In the language of macroeconomics, the credit difficulties of firms act as a
financial accelerator.
In the past decade and a half, economists have
presented evidence for this mechanism, paying
special attention to small firms. Shocks in credit
markets are found to have more serious negative
effects on small firms than on large ones: Smaller
firms, being more credit-constrained, feel the
pinch of tight credit more acutely.
The recession of 2007–2009 was particularly related to dysfunctions in credit markets. Two of

EB10-10 - The Federal Reserve Bank of Richmond

the authors of this Economic Brief, Marianna Kudlyak of the Richmond Fed and Juan M. Sánchez
of the St. Louis Fed, have looked at data for this
recession to determine whether firms responded
to credit conditions in the third quarter of 2008 in
a manner consistent with earlier scholarship. Their
findings, which will be presented in a forthcoming
paper, raise questions about the roles of small and
large firms during periods of tight credit.
Probably the most influential paper assigning a
central role to small firms is a 1994 article in the
Quarterly Journal of Economics by Mark Gertler
of New York University and Simon Gilchrist of
Boston University.1 Gertler and Gilchrist look at
the behavior of small and large manufacturing
firms around the time of five periods of contractionary monetary policy (in 1968, 1974, 1978,
1979, and 1988) and one period of “credit crunch”
(in 1966). They use a Census Bureau data set
called the “Quarterly Financial Report for Manufacturing, Mining, and Wholesale Trade,” which
provides financial data on various categories of
firms, grouped by asset size. This data set does
not break out data on individual firms, but it is

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nonetheless highly useful to economists because it
covers both publicly held and privately held firms in
its aggregate statistics—unlike sources of firm-level
data, which usually are limited to publicly traded
companies. Gertler and Gilchrist define small firms as
those at or below the 30th percentile in assets, and
large firms as those above the 30th percentile.
The results of their empirical analysis indicate that
the periods of tight money or credit have affected
small and large firms differently: The short-term
debt of small firms (consisting mainly of bank loans)
declines while that of large firms (consisting mainly
of commercial paper and bank loans) rises. The sales
and inventories of small firms, moreover, decline
much more than that of large firms. The researchers
suggest that the results reflect that large firms enjoy
easier access to credit, and that their access to credit
enables them to borrow to carry inventories in spite
of shocks in credit markets.
Kudlyak and Sánchez seek to determine whether
these findings could be reproduced in the context
of the 2007–2009 recession. First, they replicate the
Gertler and Gilchrist results for the earlier periods
(see row 4 of the table below). Then, using the same
data set and methodology as Gertler and Gilchrist,
they analyze data on short-term debt, sales, and inventories around the third quarter of 2008. They find

that the short-term debt of large firms decreases relative to that of small firms, and that the sales of large
firms contract relative to small firms—the opposite
of the findings for the earlier periods.
The table contains the findings on sales, inventories,
and short-term debt. It shows the percentage decline in the series between the start of a recession,
as dated by NBER, and the following 12 quarters. Because the values in some cases continue to increase
for a short time after the start of a recession, Kudlyak
and Sánchez in those cases use the actual maximum
achieved within a few quarters afterward. Row 1
contains the results for the 2007–2009 recession, for
which the peak of the series often coincided with the
third quarter of 2008. As can be seen from the table,
three quarters after the shock, the sales of large firms
contracted much more than those of small firms. In
terms of short-term debt, small firms lagged the large
firms: While short-term debt of large firms peaked
two quarters after the recession started, the peak in
short-term debt of small firms was five quarters after
the beginning of the recession. Thus, the difference
between the peak and the trough in short-term
debt of large firms, -18.62 percent, occurred over six
quarters, while the difference for small firms, -8.85
percent, happened over only three quarters. As new
data become available, it will be possible to learn
more about the long-run effect of the shock.

Change between Trough and Peak around the NBER Recessions and Tight Money Dates
Large Small

Large Small

Short-term Debt

2007–2009 Recession**







2001 Recession*



-13.36 -10.46



All Recessions pre–2001***







Tight Money Dates****







Note: The table contains the differences between the minimum value of the detrended series in an
interval of 12 quarters following the episode and the value at the peak of the series.
(*) The peak of the recession is 2001:Q1.
(**) The peak of the recession is 2007:Q4.
(***) The peaks of the included recessions are: 1969:Q4, 1973:Q4, 1980:Q1, 1981:Q3, and 1990:Q3.
(****) Tight money periods are 1968:Q4, 1974:Q2, 1978:Q3, 1979:Q4, 1988:Q4, and 1994:Q2.
See Gertler and Gilchrist (1994, QJE) for the details.

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To understand whether the patterns described above
are specific to the 2007–2009 episode, Kudlyak and
Sánchez then look at data for the 2001 recession (see
row 2 of the table). There, too, they find that large
firms take on relatively less short-term debt compared to small firms, and that the sales and inventories of large firms contract relative to small firms—
the same pattern as in the recessionary period of the
third quarter of 2008.
These findings are related to the work in progress by
V. V. Chari and Patrick J. Kehoe of the University of
Minnesota and the Minneapolis Fed and Lawrence J.
Christiano of Northwestern University,2 who applied
the Gertler-Gilchrist methodology to 10 business
cycles between 1953 and 2000. Chari, Kehoe, and
Christiano find that in those business cycles, taken
together, there is not a significant difference in the
responses of large and small firms to recessions.
(Row 3 of the table replicates the results of the exercise.) Based on their findings, Chari, Kehoe, and
Christiano build a model to try to reconcile their
findings with those of Gertler and Gilchrist. Examining the individual recession episodes more closely,
Kudlyak and Sánchez’s study suggests that during
the recent episodes, large firms were likely hurt
more than small ones. This finding is consistent with
the recent work by Giuseppe Moscarini and Fabien
Postel-Vinay, who find that in the 1990 and the 2001
recessions, large firms were hit particularly hard in
terms of employment.3
These findings invite further research into the role
of small firms in contractions, whether those contractions are the result of worsening credit conditions or other shocks. The findings as to periods
of tight monetary policy—with firms behaving
differently in 2007–2009 than in earlier periods of
worsening credit—suggest that the economy of
2008 did not entirely fit the longstanding model

in which small firms contract more than large firms
in response to credit shocks, and that the contraction of small firms is responsible for the amplification
of these shocks. This, together with the findings in
Chari, Kehoe, and Christiano’s research, suggests that
new or different forces may have been affecting the
behavior of firms in those recessions.
One possibility that could be explored is whether
large firms in the recent periods of tight money or
recession faced greater credit constraints than has
historically been the case—for example, because
large firms were more highly leveraged, which in
turn leads to the large firms being more heavily
constrained by the availability of credit. Other explanations may emerge for the new patterns observed
in Kudlyak and Sánchez’s study.
Marianna Kudlyak is an economist and David A. Price
is a writer in the Research Department at the Federal
Reserve Bank of Richmond. Juan M. Sánchez is an
economist at the Federal Reserve Bank of St. Louis.

Mark Gertler and Simon Gilchrist, “Monetary Policy, Busi-


ness Cycles, and the Behavior of Small Manufacturing Firms,”
Quarterly Journal of Economics, May 1994, vol. 109, no. 2, pp.
	V. V. Chari, Lawrence J. Christiano, and Patrick J. Kehoe, “The


Gertler-Gilchrist Evidence on Small and Large Firm Sales,”
Manuscript, January 2007. Online:
Giuseppe Moscarini and Fabien Postel-Vinay, “The Timing of


Labor Market Expansions: New Facts and a New Hypothesis,”
in NBER Macroeconomics Annual 2008, eds. Daron Acemoglu,
Kenneth Rogoff, and Michael Woodford, pp. 1-52, Chicago:
University of Chicago Press, 2009.

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