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Financial development, financial constraints, and the volatility of industrial output

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  • Borja Larrain

Abstract

More financially developed countries show lower volatility of industrial output. Volatility is particularly reduced in industries that are more financially dependent. Most of the reduction is in idiosyncratic volatility. Systematic volatility is reduced less strongly, implying that industries are more closely correlated with GDP in more financially developed countries. At the firm level, short-term debt is negatively correlated with output as financial development increases, suggesting that debt is used in a countercyclical way to stabilize production. The results indicate that financial development relaxes financial constraints mainly to smooth negative cashflow shocks

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 04-6.

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Date of creation: 2004
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Handle: RePEc:fip:fedbpp:04-6

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Keywords: Financial modernization ; Industrial productivity;

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Cited by:
  1. Mendicino, Caterina, 2007. "Credit market and macroeconomic volatility," Working Paper Series 0743, European Central Bank.
  2. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Computing in Economics and Finance 2005 120, Society for Computational Economics.
  3. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 143-197, June.
  4. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2009. "Financial Globalization and Economic Policies," CEPR Discussion Papers 7117, C.E.P.R. Discussion Papers.
  5. Piyapas Tharavanij, 2007. "Capital Market And Business Cycle Volatility," Development Research Unit Working Paper Series 33-07, Monash University, Department of Economics.
  6. Piti Disyatat & Chayawadee Chai-anant, 2007. "Challenges to Managing Risk and Volatility in the Emerging Market Context," Working Papers 2007-01, Economic Research Department, Bank of Thailand.

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