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Financial Development and the Volatility of Income

Tiago Pinheiro, Francisco Rivadeneyra and Marc Teignier

Staff Working Papers from Bank of Canada

Abstract: This paper presents a general equilibrium model with endogenous collateral constraints to study the relationship between financial development and business cycle fluctuations in a cross-section of economies with different sizes of their financial sector. The financial sector can amplify or dampen the volatility of income by increasing or reducing the business cycle effects of technological shocks. We find a non-monotonic relationship between the volatility of income and financial development measured by total borrowing and lending. A more developed financial system unambiguously increases the income level however the volatility can rise or fall depending on the degree of financial development.

Keywords: Credit and credit aggregates; Financial stability (search for similar items in EconPapers)
JEL-codes: E32 E60 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:13-4

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