The effects of monetary policy tightening can be observed at the level of how higher interest rates make credit more expensive for individuals, through mortgages, credit card balances and auto loans. It is also relevant to observe how credit tightening influences the performance of small enterprises, because of the decisive contribution they make to job creation.
A recent study, by economists from the Federal Reserve Bank of Atlanta measures how much credit tightening in the United States has influenced job creation among small and medium sized companies.
Starting with the contribution small firms make to employment growth, the study indicates that out of 1.5 million new jobs created between March 2020 and March 2022, two thirds, or 67 percent were created by small and medium sized firms. Also, the study points out that credit tightening is less relevant for large companies, because they are less reliant on bank credit, given their access to other funding sources, such as bond and equity issuance.
The main conclusion drawn by the study is that one percentage point of credit tightening may reduce 11 percent of job creation among small and medium sized enterprises, equivalent to a reduction of 285,000 jobs in one year.
