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Financial Development and the Volatility of Income

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  • Tiago Pinheiro
  • Francisco Rivadeneyra
  • Marc Teignier

Abstract

This paper presents a general equilibrium model with endogenous collateral constraints to study the relationship between financial development and business cycle fluctuations in a cross-section of economies with different sizes of their financial sector. The financial sector can amplify or dampen the volatility of income by increasing or reducing the business cycle effects of technological shocks. We find a non-monotonic relationship between the volatility of income and financial development measured by total borrowing and lending. A more developed financial system unambiguously increases the income level however the volatility can rise or fall depending on the degree of financial development.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2013/01/wp2013-04.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 13-4.

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Length: 36 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-4

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Keywords: Credit and credit aggregates; Financial stability;

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References

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  1. Cevdet Denizer & Murat Iyigun & Ann Owen, 2000. "Finance and Macroeconomic Volatility," Macroeconomics 0004015, EconWPA.
  2. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  3. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
  4. Joshua Aizenman, 2004. "Financial Opening and Development: Evidence and Policy Controversies," American Economic Review, American Economic Association, vol. 94(2), pages 65-70, May.
  5. Nobuhiro Kiyotaki & John Moore, 2005. "Financial Deepening," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 701-713, 04/05.
  6. �scar Jord� & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.
  7. Ali Darrat & Salah Abosedra & Hassan Aly, 2005. "Assessing the role of financial deepening in business cycles: the experience of the United Arab Emirates," Applied Financial Economics, Taylor & Francis Journals, vol. 15(7), pages 447-453.
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Cited by:
  1. Rodolfo Cermeño & Last: Cermeño & María José Roa & Last: Roa, 2013. "Desarrollo financiero, crecimiento y volatidad: Revisión de la literatura reciente," Documentos de Investigación - Research Papers 9, Centro de Estudios Monetarios Latinoamericanos, CEMLA.

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