Liquidity Needs and Vulnerability to Financial Underdevelopment
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 conditi...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2003/11/2820051/liquidity-needs-vulnerability-financial-udnerdevelopment http://hdl.handle.net/10986/17899 |
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okr-10986-178992021-04-23T14:03:40Z Liquidity Needs and Vulnerability to Financial Underdevelopment Raddatz, Claudio LIQUIDITY (ECONOMICS) FINANCIAL INSTRUMENTS MACROECONOMIC POLICY SECTORAL ASSESSMENT FINANCIAL CRISES AGGREGATE VARIABILITY OUTPUTS UNDERDEVELOPMENT FINANCIAL INTERMEDIARIES EQUITY MARKETS BENCHMARK DURABLE GOODS ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL ANALYSIS EXPENDITURES FINANCIAL MARKETS GDP PER CAPITA GROWTH RATE INTEREST RATE INVENTORIES LESS DEVELOPED COUNTRIES LIQUIDITY LOW LIQUIDITY M2 MARKET CONDITIONS MORAL HAZARD REAL GDP SALES STOCKS UNDERDEVELOPED COUNTRIES UNDERDEVELOPMENT VALUE ADDED VALUE OF OUTPUT VOLATILITY VULNERABILITY 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. 2014-04-17T17:09:03Z 2014-04-17T17:09:03Z 2003-11 http://documents.worldbank.org/curated/en/2003/11/2820051/liquidity-needs-vulnerability-financial-udnerdevelopment http://hdl.handle.net/10986/17899 English en_US Policy Research Working Paper;No. 3161 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
LIQUIDITY (ECONOMICS) FINANCIAL INSTRUMENTS MACROECONOMIC POLICY SECTORAL ASSESSMENT FINANCIAL CRISES AGGREGATE VARIABILITY OUTPUTS UNDERDEVELOPMENT FINANCIAL INTERMEDIARIES EQUITY MARKETS BENCHMARK DURABLE GOODS ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL ANALYSIS EXPENDITURES FINANCIAL MARKETS GDP PER CAPITA GROWTH RATE INTEREST RATE INVENTORIES LESS DEVELOPED COUNTRIES LIQUIDITY LOW LIQUIDITY M2 MARKET CONDITIONS MORAL HAZARD REAL GDP SALES STOCKS UNDERDEVELOPED COUNTRIES UNDERDEVELOPMENT VALUE ADDED VALUE OF OUTPUT VOLATILITY VULNERABILITY |
| spellingShingle |
LIQUIDITY (ECONOMICS) FINANCIAL INSTRUMENTS MACROECONOMIC POLICY SECTORAL ASSESSMENT FINANCIAL CRISES AGGREGATE VARIABILITY OUTPUTS UNDERDEVELOPMENT FINANCIAL INTERMEDIARIES EQUITY MARKETS BENCHMARK DURABLE GOODS ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL ANALYSIS EXPENDITURES FINANCIAL MARKETS GDP PER CAPITA GROWTH RATE INTEREST RATE INVENTORIES LESS DEVELOPED COUNTRIES LIQUIDITY LOW LIQUIDITY M2 MARKET CONDITIONS MORAL HAZARD REAL GDP SALES STOCKS UNDERDEVELOPED COUNTRIES UNDERDEVELOPMENT VALUE ADDED VALUE OF OUTPUT VOLATILITY VULNERABILITY Raddatz, Claudio Liquidity Needs and Vulnerability to Financial Underdevelopment |
| relation |
Policy Research Working Paper;No. 3161 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Raddatz, Claudio |
| author_facet |
Raddatz, Claudio |
| author_sort |
Raddatz, Claudio |
| title |
Liquidity Needs and Vulnerability to Financial Underdevelopment |
| title_short |
Liquidity Needs and Vulnerability to Financial Underdevelopment |
| title_full |
Liquidity Needs and Vulnerability to Financial Underdevelopment |
| title_fullStr |
Liquidity Needs and Vulnerability to Financial Underdevelopment |
| title_full_unstemmed |
Liquidity Needs and Vulnerability to Financial Underdevelopment |
| title_sort |
liquidity needs and vulnerability to financial underdevelopment |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2003/11/2820051/liquidity-needs-vulnerability-financial-udnerdevelopment http://hdl.handle.net/10986/17899 |
| _version_ |
1764438440224489472 |