Abstract
Empirical evidence of the credit channel of monetary policy often relies on the observance of flight to quality during monetary tightening. The identification assumption is that the typically smaller firms facing financing constraints, are disproportionally affected by the stance of monetary policy. I argue that when credit constrains are widespread, as may be the case in Emerging Markets, flight to quality should not be expected during monetary contractions. Indeed, in my model, among constrained firms, those with tighter financing constraints are less responsive to monetary conditions. I find evidence supporting my model in a sample of firms from the Emerging Market of Chile.
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Troncoso, R. Credit channel and flight to quality in emerging markets: evidence from Chile. Empir Econ 41, 183–197 (2011). https://doi.org/10.1007/s00181-011-0458-z
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DOI: https://doi.org/10.1007/s00181-011-0458-z