Liquidity Needs and Vulnerability to Financial Underdevelopment

By Claudio E. Raddatz. 2003

482 citations recorded by the source corpus.

The author 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, the author provides new evidence that: 1) Financial development affects volatility mainly through the intensive margin (output per firm). 2) Both the quality of information generated by firms, and the development of financial intermediaries have independent effects on sectoral volatility. 3) The development of financial intermediaries is more important than the development of equity markets for the reduction of volatility.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/53800585f132f0bccddcac3bba8b3cc64b8c81d2

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Citations in the corpus

Financial development, real sector, and economic growth (2015, background): “…have shown that the effect of financial development on a particular industry depends on the characteristics of that industry, such as its level of financial dependence (see, for example, Rajan & Zingales, 1998; Larrain, 2006; Raddatz, 2006; Manganelli & Popov, 2013; Huang, Fang, & Miller, 2014).”
The Structural Determinants of External Vulnerability (2006, unknown): “Ramey and Ramey (1995) were the first to document this finding for a cross-section of countries.”
Reassessing the Impact of Finance on Growth (2012, unknown): “Data sources: Penn World Tables for real GDP per worker, working population, ratio of imports and exports to GDP, ratio of government consumption to GDP and CPI; World Bank Financial Structure and Development database for banking assets to GDP, financial system deposits to GDP, banking system deposi”
Are External Shocks Responsible for the Instability of Output in Low-Income Countries? (2005, background): “The importance of institutions for output volatility has also been a source of recent debate (see Rodrick, 1999; Acemoglu et al., 2003; Raddatz, 2006; among others).”
The Real Effect of Smoking Bans: Evidence from Corporate Innovation (2018, background): “As pointed out by Claessens and Laeven (2003) and Raddatz (2006), it is less likely to have an omitted variable correlated with the interaction term than with the linear term.”
The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis (2009, methodology): “In the literature, another way to measure dependence on external financing for working capital is the ratio of inventories to sales (Raddatz 2006).”
Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks? (2010, background): “…external financing requirements (measured as in Rajan and Zingales (1998)) and liquidity needs (measured as in Raddatz (2006)), as well as the product of an industry-pair’s similarity in terms of capital intensity (measured as in Raddatz (2006)) and a country’s (log) aggregate capital per worker.”