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

Keywords

  • financial structure
  • macroeconomic volatility
  • bankruptcy costs

Fingerprint Dive into the research topics of 'Financial Structure and Macroeconomic Volatility: Theory and Evidence'. Together they form a unique fingerprint.

  • Cite this