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Financial crises, financial dependence, and industry growth

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  • Laeven, Luc
  • Klingebiel, Daniela
  • Kroszner, Randy

Abstract

The authors investigate the link between financial crises and industry growth. They analyze data from 19 industrial and developing countries that have experienced financial crises during the past 30 years to investigate how financial crises affect sectors dependent on external sources of finance. Specifically, the authors examine whether the impact of a financial crisis on externally dependent sectors varies with the depth of the financial system. They find that sectors highly dependent on external finance tend to experience a greater contraction of value added during a crisis in deeper financial systems than in countries with shallower financial systems. They hypothesize that the deepening of the financial system allows sectors dependent on external finance to obtain relatively more external funding in normal periods, so a crisis in such countries would have a disproportionately negative effect on externally dependent sectors. In contrast, since externally dependent firms tend to obtain relatively less external financing in shallower financial systems (and hence have relatively lower growth rates in such countries during normal times), a crisis in such countries has less of a disproportionately negative effect on the growth of externally dependent sectors.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2855.

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Date of creation: 30 Jun 2002
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Handle: RePEc:wbk:wbrwps:2855

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Related research

Keywords: Economic Conditions and Volatility; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; International Terrorism&Counterterrorism; Economic Theory&Research; Governance Indicators; Banks&Banking Reform; Achieving Shared Growth; Economic Conditions and Volatility;

References

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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Wei Ding & Domac, Ilker & Ferri, Giovanni, 1998. "Is there a credit crunch in East Asia?," Policy Research Working Paper Series 1959, The World Bank.
  3. Agenor, Pierre-Richard & Aizenman, Joshua, 1999. "Financial sector inefficiencies and coordination failures : implications for crisis management," Policy Research Working Paper Series 2185, The World Bank.
  4. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 407-428, June.
  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  6. Eric S. Rosengren & Joe Peek, 2000. "Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 30-45, March.
  7. Randall S. Kroszner, 1998. "On the political economy of banking and financial regulatory reform in emerging markets," Proceedings, Federal Reserve Bank of Chicago 605, Federal Reserve Bank of Chicago.
  8. Stijn Claessens & Daniela Klingebiel & Luc Laeven, 2001. "Financial Restructuring in Banking and Corporate Sector Crises: What Policies to Pursue?," NBER Working Papers 8386, National Bureau of Economic Research, Inc.
  9. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(2), pages 688-726, June.
  10. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
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  12. Jith Jayaratne & Philip E. Strahan, 1995. "The finance-growth nexus: evidence from bank branch deregulation," Research Paper, Federal Reserve Bank of New York 9513, Federal Reserve Bank of New York.
  13. Atish R. Ghosh & Swart R. Ghosh, 1999. "East Asia in the Aftermath," IMF Working Papers 99/38, International Monetary Fund.
  14. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(8), pages 1539-1560, August.
  15. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-15, C.V. Starr Center for Applied Economics, New York University.
  16. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 2107-2137, December.
  17. Jorge A. Chan-Lau & Zhaohui Chen, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," International Finance, EconWPA 9804001, EconWPA, revised 24 Apr 1998.
  18. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  19. Klingebiel, Daniela & Kroszner, Randy & Laeven, Luc & van Oijen, Pieter, 2001. "Stock market responses to bank restructuring policies during the East Asian crisis," Policy Research Working Paper Series 2571, The World Bank.
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  21. Federico Sturzenegger & Mariano Tommasi (ed.), 1998. "The Political Economy of Reform," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262194007, December.
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Citations

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Cited by:
  1. George von Furstenberg & Ulf von Kalckreuth, 2007. "Dependence on External Finance by Manufacturing Sector: Examining the Measure and its Properties," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2007-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Nandini Gupta & Kathy Yuan, 2003. "Financial Dependence, Stock Market Liberalizations, and Growth," William Davidson Institute Working Papers Series 2003-562, William Davidson Institute at the University of Michigan.
  3. Kroszner, Randall S. & Laeven, Luc & Klingebiel, Daniela, 2007. "Banking crises, financial dependence, and growth," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(1), pages 187-228, April.
  4. Dell'Ariccia, Giovanni & Detragiache, Enrica & Rajan, Raghuram, 2008. "The real effect of banking crises," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(1), pages 89-112, January.
  5. Antonio Ciccone & Elias Papaioannou, 2010. "Estimating cross-industry cross-country models using benchmark industry characteristics," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1235, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Antonio Ciccone & Elias Papaioannou, 2006. "Adjustment to target capital, finance and growth," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 982, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Feijen, Erik, 2005. "Do incumbents manipulate access to finance during banking crises?," Policy Research Working Paper Series 3660, The World Bank.
  8. Raymond Fisman & Inessa Love, 2003. "Financial Dependence and Growth Revisited," NBER Working Papers 9582, National Bureau of Economic Research, Inc.
  9. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Comparative advantage, demand for external finance, and financial development," Policy Research Working Paper Series 3889, The World Bank.
  10. Claessens,Constantijn A. & Klingebiel, Daniela & Laeven, Luc, 2004. "Resolving systemic financial crisis : policies and institutions," Policy Research Working Paper Series 3377, The World Bank.
  11. Grabowski, Szymon, 2008. "What does a financial system say about future economic growth?," MPRA Paper 11560, University Library of Munich, Germany.

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