Financial Development and the Volatility of Income
AbstractThis 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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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 13-4.
Length: 36 pages
Date of creation: 2013
Date of revision:
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Credit and credit aggregates; Financial stability;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-08 (All new papers)
- NEP-BAN-2013-02-08 (Banking)
- NEP-DGE-2013-02-08 (Dynamic General Equilibrium)
- NEP-MAC-2013-02-08 (Macroeconomics)
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