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Financial Development and the Volatility of Income

Author

Listed:
  • Tiago Pinheiro
  • Francisco Rivadeneyra
  • Marc Teignier

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.

Suggested Citation

  • Tiago Pinheiro & Francisco Rivadeneyra & Marc Teignier, 2013. "Financial Development and the Volatility of Income," Staff Working Papers 13-4, Bank of Canada.
    • Handle: RePEc:bca:bocawp:13-4
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    References listed on IDEAS

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    Cited by:

    1. Donal Smith, 2015. "Collateral Constraints and the Interest Rate," Discussion Papers 15/22, Department of Economics, University of York.
    2. Rodolfo Cermeño & María José Roa, 2013. "Desarrollo financiero, crecimiento y volatidad: Revisión de la literatura reciente," Documentos de Investigación - Research Papers 9, CEMLA.

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    More about this item

    Keywords

    Credit and credit aggregates; Financial stability;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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