Bank for International Settlements publishes research finding tighter financial conditions and a stronger US dollar hit firms in long supply chains harder

The Bank for International Settlements has published a working paper examining how access to on-demand money through overdrafts and credit lines affects firms in production networks. The paper finds that firms in longer and more complex supply chains have higher working capital needs and rely more on undrawn credit lines, making them more vulnerable when financial conditions tighten. Output falls more sharply for these firms, and the effects spread through supply chains, especially from upstream suppliers to downstream customers. Using firm-level data merged with world input-output tables, the authors find that firms with longer supply-chain positions hold larger undrawn credit lines and suffer larger sales declines when financial conditions worsen. The estimated impact peaks about four quarters after the shock, and a one standard deviation tightening in financial conditions combined with an increase in a firm's undrawn credit ratio from the 25th to the 75th percentile is associated with a 10 percentage point larger drop in sales. Corporate bond spreads and the broad US dollar exchange rate appear to matter more for these dynamics than interest rates, while production-network spillovers account for roughly two-thirds of the total output effect. The paper states that the views expressed are those of the authors and do not necessarily reflect those of the BIS or its member central banks.