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Do Banks Affect the Level and Composition of Industrial Volatility?

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  • BORJA LARRAIN

Abstract

In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in countries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via countercyclical borrowing: At the firm level, short-term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit. Copyright 2006 by The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 4 (08)
Pages: 1897-1925

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Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1897-1925

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Cited by:
  1. Thorsten Beck & Tao Chen & Chen Lin & Frank M. Song, 2012. "Financial Innovation: The Bright and the Dark Sides," Working Papers 052012, Hong Kong Institute for Monetary Research.
  2. Ratti, Ronald A. & Lee, Sunglyong & Seol, Youn, 2008. "Bank concentration and financial constraints on firm-level investment in Europe," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2684-2694, December.
  3. Ho-Chuan (River) Huang & Stephen M. Miller, 2012. "Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility," Working Papers 1206, University of Nevada, Las Vegas , Department of Economics.
  4. Bezemer, Dirk & Grydaki, Maria, 2013. "Debt and the U.S. Great Moderation," MPRA Paper 47399, University Library of Munich, Germany.
  5. Acharya, Viral V & Imbs, Jean & Sturgess, Jason, 2007. "Finance and Efficiency: Do Bank Branching Regulations Matter?," CEPR Discussion Papers 6202, C.E.P.R. Discussion Papers.
  6. Ho-Chuan (River) Huang & Stephen M. Miller, . "Does Financial Development Volatility Affect Industrial Growth Volatility?," Working Papers 1302, University of Nevada, Las Vegas , Department of Economics.
  7. Grydaki, Maria & Bezemer, Dirk J., 2012. "The Role of Credit in Great Moderation: a Multivariate GARCH Approach," MPRA Paper 39813, University Library of Munich, Germany.
  8. Delis, Manthos D & Kouretas, Georgios, 2010. "Interest rates and bank risk-taking," MPRA Paper 20132, University Library of Munich, Germany.
  9. repec:hal:cesptp:halshs-00469521 is not listed on IDEAS
  10. Thompson, Samuel B., 2011. "Simple formulas for standard errors that cluster by both firm and time," Journal of Financial Economics, Elsevier, vol. 99(1), pages 1-10, January.
  11. Indrit Hoxha, 2013. "The effect of banking market structure on the volatility of growth of manufacturing sectors in developing countries," Journal of Economics and Finance, Springer, vol. 37(4), pages 528-546, October.
  12. Lin, Pei-Chien & Huang, Ho-Chuan (River), 2012. "Banking industry volatility and growth," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1007-1019.
  13. Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
  14. Tom Gole & Tao Sun, 2013. "Financial Structures and Economic Outcomes," IMF Working Papers 13/121, International Monetary Fund.
  15. Fabrizio Coricelli & Isabelle Roland, 2010. "Credit and recessions," Documents de travail du Centre d'Economie de la Sorbonne 10022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  16. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.

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