Financial Structure and Macroeconomic Volatility

Theory and Evidence

Research output: Book/ReportReportProfessional

Abstract

This paper presents a simple model capturing differences between debt and equity finance to examine how financial structure matters for macroeconomic volatility. Debt finance is relatively cheap in the sense that debt holders need to verify relatively few profitability states, but debt finance may lead to costly bankruptcy. At the aggregate level, a more debt-based financial structure leads to a higher bankruptcy rate. Therefore, aggregate output is more variable in case of a heavy reliance on debt finance. This paper provides empirical evidence that countries with more equity finance have a lower variance of GDP and a lower probability of episodes of negative economic growth.
Original languageEnglish
Place of PublicationLondon
PublisherCEPR
Number of pages36
Publication statusPublished - 2006

Publication series

NameCEPR Discussion Paper
No.5697

Fingerprint

Financial structure
Debt finance
Macroeconomic volatility
Debt
Bankruptcy
Equity finance
Lower probabilities
Aggregate output
Empirical evidence
Profitability
Economic growth

Keywords

  • financial structure
  • macroeconomic volatility
  • bankruptcy costs

Cite this

Huizinga, H. P., & Zhu, D. (2006). Financial Structure and Macroeconomic Volatility: Theory and Evidence. (CEPR Discussion Paper; No. 5697). London: CEPR.
Huizinga, H.P. ; Zhu, D. / Financial Structure and Macroeconomic Volatility : Theory and Evidence. London : CEPR, 2006. 36 p. (CEPR Discussion Paper; 5697).
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Huizinga, HP & Zhu, D 2006, Financial Structure and Macroeconomic Volatility: Theory and Evidence. CEPR Discussion Paper, no. 5697, CEPR, London.

Financial Structure and Macroeconomic Volatility : Theory and Evidence. / Huizinga, H.P.; Zhu, D.

London : CEPR, 2006. 36 p. (CEPR Discussion Paper; No. 5697).

Research output: Book/ReportReportProfessional

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AB - This paper presents a simple model capturing differences between debt and equity finance to examine how financial structure matters for macroeconomic volatility. Debt finance is relatively cheap in the sense that debt holders need to verify relatively few profitability states, but debt finance may lead to costly bankruptcy. At the aggregate level, a more debt-based financial structure leads to a higher bankruptcy rate. Therefore, aggregate output is more variable in case of a heavy reliance on debt finance. This paper provides empirical evidence that countries with more equity finance have a lower variance of GDP and a lower probability of episodes of negative economic growth.

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Huizinga HP, Zhu D. Financial Structure and Macroeconomic Volatility: Theory and Evidence. London: CEPR, 2006. 36 p. (CEPR Discussion Paper; 5697).