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Consumption Risk Sharing over the Business Cycle: the Role of Small Firms' Access to Credit Markets

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  • Mathias Hoffmann
  • Iryna Shcherbakova

Abstract

Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms’ access to credit markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share income or employment. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They suggest a major additional benefit from banking deregulation: access to bank credit has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2544.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2544

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Keywords: interstate risk sharing; regional business cycle; proprietary income; small businesses; state banking deregulation;

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References

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  1. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sørensen, 2006. "FU.S. banking deregulation, small businesses, and interstate insurance of personal income," Working Paper, Norges Bank 2006/09, Norges Bank.
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  4. Donald Morgan & Bertrand Rime & Philip E. Strahan, 2004. "Bank Integration and State Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(4), pages 1555-1584, November.
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  7. Hanno Lustig & Stijn Van Nieuwerburgh, 2003. "Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perpective," NBER Working Papers 9959, National Bureau of Economic Research, Inc.
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  12. Viral V. Acharya & Jean Imbs & Jason Sturgess, 2006. "Finance and Efficiency: Do Bank Branching Regulations Matter?," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 06-36, Swiss Finance Institute.
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  14. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1081-1110, November.
  15. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics And Politics Of The Relaxation Of Bank Branching Restrictions," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(4), pages 1437-1467, November.
  16. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 957-76, October.
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Citations

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Cited by:
  1. Markus Leibrecht & Johann Scharler, 2009. "Banks, Financial Markets and International Consumption Risk Sharing," Department of Economics Working Papers, Vienna University of Economics, Department of Economics wuwp128, Vienna University of Economics, Department of Economics.
  2. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 376, Institute for Empirical Research in Economics - University of Zurich.
  3. Martin Halla & Johann Scharler, 2012. "Marriage, Divorce, and Interstate Risk Sharing," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 114(1), pages 55-78, 03.
  4. Teng Sun, Stephen & Yannelis, Constantine, 2013. "Credit Constraints and Demand for Higher Education: Evidence from Financial Deregulation," MPRA Paper 48726, University Library of Munich, Germany.
  5. Nitschka, Thomas, 2010. "Securitization, collateral constraints and consumption risk sharing in the euro area," Economics Letters, Elsevier, Elsevier, vol. 106(3), pages 197-199, March.
  6. Fratzscher, Marcel & Imbs, Jean, 2009. "Risk sharing, finance, and institutions in international portfolios," Journal of Financial Economics, Elsevier, Elsevier, vol. 94(3), pages 428-447, December.
  7. Claudia M. Buch & T. Körner & B. Weigert, 2013. "Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute," IWH Discussion Papers, Halle Institute for Economic Research 13, Halle Institute for Economic Research.
  8. Thomas Nitschka, 2012. "Banking sector's international interconnectedness: Implications for consumption risk sharing in Europe," Working Papers 2012-04, Swiss National Bank.

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