How does finance affect employment and inter-industry job reallocation? We present a model that predicts that financial development (i) increases employment and/or labour productivity and wages, with a smaller impact at high levels of the equilibrium wage and financial development; (ii) may induce either more or less reallocation of jobs depending on whether shocks to profit opportunities or to cash flow predominate; (iii) amplifies the output and employment losses in cri-ses, firms that rely most on banks for liquidity being hit the hardest. Testing these predictions on international industry-level data for 1970–2003, we find that standard measures of financial development are indeed associated with greater employment growth, although only in non-OECD countries, and are not correlated with labour productivity or real wage growth. Moreover, they correlate negatively with inter-industry dispersion of employment growth. Finally, there is some evidence of a ‘dark side ’ of financial development, in that during banking crises employment grows less in the industries that are more dependent on ex-ternal finance and those located in the more financially developed countries.

The main objective of this paper is to explore the determinants of private consumption growth volatility in India, focusing on the role of financial sector policies. Using annual time series data, the results show that the implementation of financial repressionist policies is strongly associated with lower consumption volatility in India. The results remain robust after controlling for a wide range of macroeconomic shocks and variables. The presence of a threshold effect suggests that the benefits of financial reforms in reducing consumption volatility can only be reaped when the financial system becomes sufficiently liberalized. The results also indicate that the presence of a more open financial system may serve to dampen fluctuations in private consumption.

Preliminary version (please do not quote) Over the past quarter century, much of the developed and developing world has experienced a great moderation. Economic growth is more stable than it once was. Using data from 13 OECD countries, we analyze the role of financial development in relieving household liquidity constraints, thereby allowing for smoother consumption and less volatile growth. In the paper we begin by documenting the combined reduction in the volatility of both consumption and real growth, together with the increases in credit extended to the private sector. Our data allows us estimate the time variation in the proportion of the population that is limited to consuming, at most, its current income (thus violating the life-cycle permanent income hypothesis). We then proceed to make the case for a causal relationship: Financial development increases access to credit markets, enabling households to smooth their consumption, which reduces the volatility of consumption and real growth.

This paper investigates the effect of capital market development on severity of economic contraction, and probability of economic downturn. The major finding is that countries with deeper capital market would face less severe business cycle output contraction, and lower chance of an economic downturn. The results hold even after controlling for other relevant variables, country specific effects, and state dependence. However, marginal effects are relatively small. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004.

SOM-theme E: Financial markets and institutions We investigate whether the financial system dampens or exacerbates monetary shocks of inflation uncertainty to the economy. Our GMM-estimates for 88 countries over a period of 25 years show that inflation uncertainty has a positive and significant impact on the volatility of economic growth. More importantly, we find that financial development dampens the negative effects of inflation uncertainty on the volatility of economic growth. This confirms the This paper contributes to the discussion on financial development and economic growth as well as to that on the impact of monetary shocks on the economy. We seek to address the question whether a well-developed financial system may dampen or exacerbate shocks caused by inflation. In contrast to most papers in this field, this

and the Price of Bank Loans Since the 1990’s, developing countries have privatized their manufacturing and banking sectors. As a result, a substantially larger share of external debt has been contracted by the private sector. We examine the effects on bank loan prices as a result of this major change in the international debt markets. We find that, in general, the private sector’s external debts negatively affect the price of bank loans. Yet this impact is mitigated by the presence of potential market distortions, due to, for example, fixed foreign exchange regimes that the private sector may benefit from, but which also can exacerbate any potential negative aspect. Even so, as a general rule, the private sector’s external debts promote financial stability. Adequate market conditions, however, should be implemented to prevent potential market distortions.

While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given financial development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the volatility of real value added per firm growth. A variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity need indicators, and omitted variables.

Countries which initiate economic development, use in the most cases, the mechanisms and tools of the financial sphere to maximize the chances of success of their financial development process. However, some financial, economic and institutional conditions are compulsory for the success of the whole process. In this context, our empirical analysis using panel data is applied on two samples divided among 15 developed and 23 developing countries over a period from 1997 to 2013.The result obtained show that financial development determinants are mainly related to banking and financial sector and the level of economic and human development for both samples. Whereas, the determinants related to economic stability and the legal and institutional framework have a significant impact on financial development only in the developed countries. Key words: financial development, macroeconomic stability, legal and institutional environment, developed and developing countries, panel data 1.

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This paper investigates the role of financial markets in evaluating the asymmetric impact of monetary policy on real output over the business cycle. We use quarterly US data which cover 1971:q1–2011:q4 and implement an instrumental variables Markov regime switching methodology to account for the endogeneity problem. Our investi-gation shows that monetary policy has a significant impact on output growth during recessions. More interestingly, we find that financial depth plays an important role as it dampens the effects of monetary policy in recessions. The results are robust compared to an alternative financial depth measure and a different sample period.