Delayed Payments in Supply Chains and Transmission of Monetary Policy

Abstract

This paper examines the role of firms’ operating cash flows for the transmission of monetary policy. Using supplier-customer data for public US firms, I find that delayed payments for intermediate inputs in supply chains weaken suppliers’ investment response to monetary policy shocks, with the effect significant up to ten quarters. I rationalise these findings using a heterogeneous firm New Keynesian model where delayed payments adversely affect suppliers’ cash flows. In the presence of financial frictions, lower cash flows constrain the ability of affected suppliers to borrow and finance investment. As evidence for this mechanism, I use firm balance sheet and loan-level data to show that suppliers exposed to delayed payments face tighter borrowing constraints. Moreover, exposure to delayed payments dampens the response of suppliers’ cash flows and borrowing to monetary policy shocks, consistent with the proposed mechanism. Calibrating the model to match relevant data, I show that the framework can replicate the magnitude and persistence of heterogeneity in investment response to monetary policy. Finally, I use the model to simulate the steep deterioration in payment behaviour during COVID-19 and find that the response of aggregate investment to a monetary policy shock is 17% weaker than it would be in the absence of delayed payments, highlighting the quantitative relevance of the proposed channel.