Financial Development, Financial Constraints, and the Volatility of Industrial Output

50 Pages Posted: 4 Mar 2006

See all articles by Borja Larrain

Borja Larrain

Pontificia Universidad Catolica de Chile

Date Written: July 2004

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.

Keywords: financial development, financial constraints, volatility

JEL Classification: E32, G0, G31, O16

Suggested Citation

Larrain, Borja, Financial Development, Financial Constraints, and the Volatility of Industrial Output (July 2004). FRB of Boston Public Policy Discussion Paper No. 04-6. Available at SSRN: https://ssrn.com/abstract=887928 or http://dx.doi.org/10.2139/ssrn.887928

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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