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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

Suggested Citation

  • Borja Larrain, 2004. "Financial development, financial constraints, and the volatility of industrial output," Public Policy Discussion Paper 04-6, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:04-6
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    References listed on IDEAS

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    Cited by:

    1. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    2. repec:eee:ememar:v:34:y:2018:i:c:p:143-161 is not listed on IDEAS
    3. Tharavanij, Piyapas, 2007. "Capital Market and Business Cycle Volatility," MPRA Paper 4952, University Library of Munich, Germany.
    4. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, Elsevier.
    5. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Money Macro and Finance (MMF) Research Group Conference 2005 74, Money Macro and Finance Research Group.
    6. Iordanis Kalaitzoglou & Beatrice Durgheu, 2016. "Financial growth and Economic Growth in Europe : Is the Euro Beneficial for All Countries?," Post-Print hal-00859252, HAL.
    7. Piti Disyatat & Chayawadee Chai-anant, 2007. "Challenges to Managing Risk and Volatility in the Emerging Market Context," Working Papers 2007-01, Monetary Policy Group, Bank of Thailand.
    8. repec:bla:econpa:v:36:y:2017:i:4:p:429-443 is not listed on IDEAS

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    Keywords

    Financial modernization ; Industrial productivity;

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