Do Banks Affect the Level and Composition of Industrial Volatility and How?

56 Pages Posted: 12 Oct 2004

See all articles by Borja Larrain

Borja Larrain

Pontificia Universidad Catolica de Chile

Date Written: July 2004

Abstract

In theory, better access to bank credit can increase or reduce output volatility depending on whether financially constrained firms face more cash-flow or investment opportunity shocks. This paper finds that countries with high levels of bank credit have low volatility of industrial output. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is also reduced, but less strongly so. Volatility dampening is achieved via counter-cyclical borrowing: at the firm level, short-term borrowing is more negatively correlated with sales in countries with high levels of bank credit.

Keywords: Banks, financial constraints, financial development, idiosyncratic volatility, volatility

JEL Classification: E32, G0, G31, O16

Suggested Citation

Larrain, Borja, Do Banks Affect the Level and Composition of Industrial Volatility and How? (July 2004). Available at SSRN: https://ssrn.com/abstract=579864 or http://dx.doi.org/10.2139/ssrn.579864

Borja Larrain (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

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