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Bank Finance versus Bond Finance: What Explains the Differences Between US and Europe?

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  • Harald Uhlig
  • Fiorella De Fiore

    ()
    (Directorate General Research European Central Bank)

Abstract

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance-corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher effciency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 618.

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Date of creation: 2005
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Handle: RePEc:red:sed005:618

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Keywords: Financial structure; agency costs; heterogeneity;

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