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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 financial 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 of output. 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 also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 363.

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Date of creation: Mar 2008
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Handle: RePEc:zur:iewwpx:363

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Keywords: Interstate risk sharing; regional business cycle; proprietary income; state banking deregulation;

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Cited by:
  1. 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.
  2. Halla, Martin & Scharler, Johann, 2008. "Marriage, Divorce and Interstate Risk Sharing," IZA Discussion Papers 3744, Institute for the Study of Labor (IZA).
  3. Nitschka, Thomas, 2011. "Banking sectors' international interconnectedness: Implications for consumption risk sharing in Europe," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48684, Verein für Socialpolitik / German Economic Association.
  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. Markus Leibrecht & Johann Scharler, 2009. "Banks, Financial Markets and International Consumption Risk Sharing," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2009-14, Department of Economics, Johannes Kepler University Linz, Austria.
  6. 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.
  7. Fratzscher, Marcel & Imbs, Jean, 2007. "Risk sharing, finance and institutions in international portfolios," Working Paper Series, European Central Bank 0826, European Central Bank.
  8. 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.

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