Consumption Risk Sharing over the Business Cycle: The Role of Small Firms' Access to Credit Markets

Institute for Empirical Research in Economics Working Paper No. 363

CESifo Working Paper Series No. 2544

53 Pages Posted: 1 Apr 2008

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Iryna Stewen

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Date Written: February 1, 2009

Abstract

Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to credit 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 income or employment. 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 suggest a major additional benefit from banking deregulation: access to bank credit has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns.

Keywords: Interstate risk sharing, regional business cycle, proprietary income, small businesses, state banking deregulation

JEL Classification: E32, E44, F3

Suggested Citation

Hoffmann, Mathias and Stewen, Iryna, Consumption Risk Sharing over the Business Cycle: The Role of Small Firms' Access to Credit Markets (February 1, 2009). Institute for Empirical Research in Economics Working Paper No. 363, CESifo Working Paper Series No. 2544, Available at SSRN: https://ssrn.com/abstract=1114054

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Iryna Stewen

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany

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