Financial Structure and Macroeconomic Volatility: a Panel Data Analysis

Emiel van Bezooijen and Jacob Bikker ()

No 17-13, Working Papers from Utrecht School of Economics

Abstract: In 2015, the European Commission (EC) launched its action plan for the creation of a European Capital Markets Union. The EC aims to return the European economy to sustainable growth and to enhance its shock absorbing capacity by reducing the reliance on bank finance and stimulating financial deepening and cross-border integration of Europe’s capital markets. Financial diversification and integrated European capital markets are expected to improve risk sharing among households, supporting economic stability. However, the economic literature reveals a lack of theoretical and empirical consensus on the superiority of either a bank-based or a market-based financial system in promoting growth or reducing macroeconomic volatility. This paper is the first to include bond markets in its financial structure indicators, besides stock markets and bank lending. Using panel data on 55 countries between 1975 and 2014 and three different measures of financial structure, we investigate the effect of the structure of the financial system on the volatility of output and investment growth as well as their cyclical components. We do not find evidence that market-based financial structures dampen volatility of output or overall investment. Increase of the stock market size relative to that of the banking sector has a significant positive effect on the business cycle volatility of investments.

Keywords: financial developmen; financial system structure; macroeconomic volatility; market-based finance; bank-based finance; capital market integration; business cycle (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-cta, nep-eec, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://dspace.library.uu.nl/bitstream/handle/1874 ... USE_DP_2017_1713.pdf (application/pdf)

Related works:
Journal Article: Financial Structure and Macroeconomic Volatility: A Panel Data Analysis (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:use:tkiwps:1713

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Utrecht School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Marina Muilwijk ().