Liquidity Needs and Vulnerability to Financial Underdevelopment

Abstract

No AccessPolicy Research Working Papers25 Jun 2013Liquidity Needs and Vulnerability to Financial UnderdevelopmentAuthors/Editors: Claudio RaddatzClaudio Raddatzhttps://doi.org/10.1596/1813-9450-3161SectionsAboutPDF (0.6 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:Raddatz provides evidence of a causal and economically important effect of financial development on volatility. In contrast to the existing literature, the identification strategy is based on the differences in sensitivities to financial conditions across industries. The results show that sectors with larger liquidity needs are more volatile and experience deeper crises in financially underdeveloped countries. At the macroeconomic level, the results suggest that changes in financial development can generate important differences in aggregate volatility. The author also finds that financially underdeveloped countries partially protect themselves from volatility by concentrating less output in sectors with large liquidity needs. Nevertheless, this insulation mechanism seems to be insufficient to reverse the effects of financial underdevelopment on within-sector volatility. Finally, Raddatz provides new evidence that: • Financial development affects volatility mainly through the intensive margin (output per firm). • Both the quality of information generated by firms, and the development of financial intermediaries have independent effects on sectoral volatility. • The development of financial intermediaries is more important than the development of equity markets for the reduction of volatility. This paper—a product of Macroeconomics and Growth, Development Research Group—is part of a larger effort in the group to understand the determinants of macroeconomic volatility. Previous bookNext book FiguresReferencesRecommendedDetailsCited ByEffect of seasonality, sales growth rate, and fiscal year end on cash conversion cycleDecision Sciences, Vol.8119 August 2021The Economic Effects of Employment Protection: Evidence from International Industry-Level DataSSRN Electronic JournalDo Banks Affect the Level and Composition of Industrial Volatility?The Journal of Finance, Vol.61, No.43 August 2006Volatility of GDP, Macro Applications and Policy Implications of Real Options for Structure of Capital MarketsSSRN Electronic JournalFinance and VolatilityFinance and the Business Cycle: International, Inter-Industry EvidenceThe Journal of Finance, Vol.60, No.33 May 2005Employment Protection and Gross Job Flows: A Differences-in-Differences ApproachSSRN Electronic JournalDo Banks Affect the Level and Composition of Industrial Volatility and How?SSRN Electronic JournalFinancial Development, Financial Constraints, and the Volatility of Industrial OutputSSRN Electronic Journal View Published: November 2003 Copyright & Permissions Related RegionsLatin America & CaribbeanRelated CountriesCzech RepublicEgypt, Arab Rep.Timor-LesteRelated TopicsFinance and Financial Sector DevelopmentMacroeconomics and Economic GrowthPoverty ReductionPrivate Sector Development KeywordsBANK CRED CASH FLOWECONOMIC VOLATILITYEQUITYEQUITY MARKETSFINANCIAL DEVELOPMENTFINANCIAL INSTITUTIONSFINANCIAL INTERMEDIARIESFINANCIAL MARKETSFINANCIAL SYSTEMFIXED CAPITALINVESTMENTLIQUIDITYMACROECONOMIC LEVELOUTPUTOUTPUT RATIOSTOCK MARKETSUNDERDEVELOPED COUNTRIESVOLATILITYWORKING CAPITAL PDF DownloadLoading ...