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

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  • De Fiore, Fiorella
  • Uhlig, Harald

Abstract

We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose between 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 efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.

Suggested Citation

  • De Fiore, Fiorella & Uhlig, Harald, 2005. "Bank Finance versus Bond Finance: What Explains the Differences Between the US and Europe?," CEPR Discussion Papers 5213, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5213
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Liu, Guangling (Dave) & Seeiso, Nkhahle E., 2012. "Basel II procyclicality: The case of South Africa," Economic Modelling, Elsevier, vol. 29(3), pages 848-857.
    2. Goddard, John & Molyneux, Philip & Wilson, John O.S. & Tavakoli, Manouche, 2007. "European banking: An overview," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1911-1935, July.
    3. Gelain, Paolo, 2010. "The external finance premium in the Euro area: A dynamic stochastic general equilibrium analysis," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 49-71, March.
    4. Guangling (Dave) Liu & Nkhahle E. Seeiso, 2011. "Business Cycle and Bank Capital Regulation: Basel II Procyclicality," Working Papers 221, Economic Research Southern Africa.
    5. Kwapil, Claudia & Scharler, Johann, 2010. "Interest rate pass-through, monetary policy rules and macroeconomic stability," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 236-251, March.
    6. Merola, Rossana, 2010. "Optimal monetary policy in a small open economy with financial frictions," Discussion Paper Series 1: Economic Studies 2010,01, Deutsche Bundesbank.
    7. Russ, Katheryn N. & Valderrama, Diego, 2012. "A theory of bank versus bond finance and intra-industry reallocation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 652-673.
    8. Denise Côté & Christopher Graham, 2007. "Corporate Balance Sheets in Developed Economies: Implications for Investment," Staff Working Papers 07-24, Bank of Canada.
    9. ZHANG, Jiarui & HOU, Lei, 2014. "Financial structure, productivity, and risk of foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 42(3), pages 652-669.

    More about this item

    Keywords

    agency costs; financial structure; heterogeneity;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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