Credit chains and sectoral comovemen t: does the use of trade credit amplify sectoral shocks ?

This paper provides evidence of the presence and relevance of a credit-chain amplification mechanism by looking at its implications for the correlation of industries. In particular, it tests the hypothesis that an increase in the use of trade-credit along the input-output chain linking two industries results in an increase in their correlation. The analysis uses detailed data on the correlations and input-output relations of 378 manufacturing industry-pairs across 44 countries with different degrees of use of trade credit. The results provide strong support for this hypothesis and indicate that the mechanism is quantitatively relevant.Economic Theory&Research,Access to Finance,Bankruptcy and Resolution of Financial Distress,Investment and Investment Climate,

Liquidity needs and vulnerability to financial udnerdevelopment

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.Payment Systems&Infrastructure,Economic Theory&Research,Markets and Market Access,Fiscal&Monetary Policy,Financial Crisis Management&Restructuring,Economic Theory&Research,Financial Crisis Management&Restructuring,Fiscal&Monetary Policy,Development Economics&Aid Effectiveness,Markets and Market Access

Are external shocks responsible for the instability of output in low income countries?

External shocks, such as commodity price fluctuations, natural disasters, and the role of the international economy, are often blamed for the poor economic performance of low-income countries. The author quantifies the impact of these different external shocks using a panel vector autoregression (VAR) approach and compares their relative contributions to output volatility in low-income countries vis-à-vis internal factors. He finds that external shocks can only explain a small fraction of the output variance of a typical low-income country. Internal factors are the main source of fluctuations. From a quantitative perspective, the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of these countries.Economic Theory&Research,Inequality,Macroeconomic Management,Achieving Shared Growth,Fiscal&Monetary Policy

When the rivers run dry : liquidity and the use of wholesale funds in the transmission of the U.S. subprime crisis

This paper provides systematic evidence of the role of banks'reliance on wholesale funding in the international transmission of the ongoing financial crisis. It conducts an event study to estimate the impact of the liquidity crunch of September 15, 2008, on the stock price returns of 662 individual banks across 44 countries, and tests whether differences in the abnormal returns observed around those events relate to these banks'ex-ante reliance on wholesale funding. Globally and within countries, banks that relied more heavily in non-deposit sources of funds experienced a significantly larger decline in stock returns even after controlling for other mechanisms. Within a country, the abnormal returns of banks with high wholesale dependence fell about 2 percent more than those of banks with low dependence during the three days following Lehman Brothers'bankruptcy. This large differential return suggests that liquidity played an important role in the transmission of the crisis.Banks&Banking Reform,Debt Markets,Access to Finance,Financial Intermediation,Emerging Markets

Sudden stops and financial frictions : evidence from industry level data

The nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming. This paper uses industry-level data in a sample of 45 developed and emerging countries and a differences-in-differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops. The results show that, consistently with financial frictions being important, industries that are more dependent on external finance decline significantly more during a sudden stop, especially in less financially developed countries. The results are robust to controlling for other possible mechanisms, including labor market frictions. The paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks.Debt Markets,Emerging Markets,Access to Finance,Currencies and Exchange Rates,Economic Theory&Research

Monetary Policy and Sectoral Shocks: Did the FED react properly to the High-Tech Crisis?

This paper presents an identification strategy that allows us to study both the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. We apply our methodology to the case of the U.S. and find some significant differences in the sectorial responses to monetary policy. We also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to Equipment and Software investment, which we naturally identify with the High-tech crises, induces a response by the monetary authority that generates a temporary boom in Residential Investment and Durable Consumption but has almost no effect on the high-tech sector. Finally, we perform an exercise evaluating what the model predicts regarding the automatic and a more aggressive monetary policy response to a shock similar to the one that hit the U.S. in early 2001. We find that the actual drop in interest rates we have observed is in line with the predictions of the model.

Monetary policy and sectoral shocks : did the Federal Reserve react properly to the high-tech crisis?

The authors present an identification strategy that allows them to study the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. They apply their methodology to the case of the United States and find some significant differences in the sectoral responses to monetary policy. They also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to equipment and software investment, which one identifies with the high-tech crisis, induces a response by the monetary authority that generates a temporary boom in residential investment and durables consumption but has almost no effect on the high-tech sector. Finally, the authors perform an exercise evaluating the model's predictions about the automatic and more aggressive monetary policy response to a shock similar to the one that hit the United States in early 2001. They find that the actual drop in interest rates is in line with the predictions of the model.Labor Policies,Economic Theory&Research,Financial Intermediation,Payment Systems&Infrastructure,ICT Policy and Strategies,Economic Stabilization,Economic Theory&Research,Macroeconomic Management,Financial Intermediation,ICT Policy and Strategies

How do governments respond after catastrophes ? natural-disaster shocks and the fiscal stance

Natural disasters could constitute a major shock to public finances and debt sustainability because of their impact on output and the need for reconstruction and relief expenses. This paper uses a panel vector autoregressive model to systematically estimate the impact of geological, climatic, and other types of natural disasters on government expenditures and revenues using annual data for high and middle-income countries over 1975-2008. The authors find that, on average budget, deficits increase only after climatic disasters, but for lower-middle-income countries, the increase in deficits is widespread across all events. Disasters do not lead to larger deficit increases or larger output declines in countries with higher initial government debt. Countries with higher financial development suffer smaller real consequences from disasters, but deficits expand further in these countries. Disasters in countries with high insurance penetration also have smaller real consequences but do not result in deficit expansions. From an ex-post perspective, the availability of insurance offers the best mitigation approach against real and fiscal consequences of disasters.Debt Markets,Natural Disasters,Economic Theory&Research,Disaster Management,Access to Finance

Banking on politics

This paper presents new data from 150 countries showing that former cabinet members, central bank governors, and financial regulators are many orders of magnitude more likely than other citizens to become board members of banks. Countries where the politician-banker phenomenon is more prevalent have higher corruption and more powerful yet less accountable governments, but not better functioning financial systems. Regulation becomes more pro-banker where this happens more often. Furthermore, a higher fraction of the rents that are created accrue to bankers, former politicians are not more likely to be directors when their side is in power, and banks are more profitable without being more leveraged. Rather than supporting a public interest view, the evidence is consistent with a capture-type private interest story where, in exchange for a non-executive position at a bank in the future, politicians provide for beneficial regulation.Banks&Banking Reform,Public Sector Corruption&Anticorruption Measures,,Access to Finance,Corporate Law

Trade liberalization and the politics of financial development

A well developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents'rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the political equilibrium level of financial system development. This may be perturbed by the effect of trade liberalization in the strength of each group. Using a sample of 41 trade liberalizers the authors conduct an event study and show that the change in the strength of promoters vis-a-vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds, or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induces competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians.Payment Systems&Infrastructure,Health Economics&Finance,Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Achieving Shared Growth,Macroeconomic Management