Consumption risk sharing over the business cycle: the role of small firms' access to credit markets

Mathias Hoffmann and Iryna Shcherbakova
Authors registered in the RePEc Author Service: Iryna Stewen

No 363, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level.

Keywords: Interstate risk sharing; regional business cycle; proprietary income; state banking deregulation (search for similar items in EconPapers)
JEL-codes: E32 E44 F3 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-bec, nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Consumption Risk Sharing over the Business Cycle: The Role of Small Firms' Access to Credit Markets (2011)
Working Paper: Consumption Risk Sharing over the Business Cycle: the Role of Small Firms' Access to Credit Markets (2009)
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