Do Banks Affect the Level and Composition of Industrial Volatility?

  • Author(s): BORJA LARRAIN
  • Published: Aug 03, 2006
  • Pages: 1897-1925
  • DOI: 10.1111/j.1540-6261.2006.00892.x


In theory, better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions. This paper finds that the volatility of industrial output is lower in countries with more bank credit. Most of the reduction in volatility is idiosyncratic, which follows from the ability of banks to pool and diversify shocks. Systematic volatility is reduced less strongly. Volatility dampening is achieved via countercyclical borrowing: At the firm level, short‐term borrowing is less (or more negatively) correlated with sales and inventories in countries with high levels of bank credit.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Members' Login


Members' Options

Site Footer

View Mobile Version