Capital Market, Severity of Business Cycle, and Probability of an Economic Downturn

Tharavanij, Piyapas (2007): Capital Market, Severity of Business Cycle, and Probability of an Economic Downturn. Unpublished.

Abstract

This paper investigates the relationships of capital market, severity of economic contraction, and probability of an economic downturn. The finding supports a theoretical prediction that countries with more advanced capital markets would face less severe business cycle output contraction, and a lower chance of an economic downturn. The results hold even after controlling for other relevant variables, country specific effects, and state dependences. However, the marginal effects are small. Results are generated using panel estimation technique with panel data from 44 countries covering the years 1975 through 2004.

• Item Type: MPRA Paper
• Institution: Monash University, Dept. of Economics
• Language: English
• Keywords: business cycle; capital market; financial development; financial structure; panel data; market-based; bank-based
• Subjects: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C33 - Models with Panel Data; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G0 - General > G00 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles; C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C35 - Discrete Regression and Qualitative Choice Models; Discrete Regressors; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages; C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C34 - Truncated and Censored Models

References

Acemoglu, Daron; Johnson, Simon; Robinson, James and Thaicharoen, Yunyong. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth." NBER working paper No.9124, 2002. Acemoglu, Daron and Zilibotti, Fabrizio. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth." Journal of political economy, 1997, 105(4), pp. 709-51. Aghion, Philippe; Banerjee, Abhijit and Piketty, Thomas. "Dualism and Macroeconomic Volatility." Quarterly Journal of Economics, 1999, 114(4), pp. 1359-97. Barro, Robert J. and Lee, Jong-Wha. "International Data on Educational Attainment: Updates and Implications." CID Working Paper No. 42, 2000. Baxter, Marianne and King, Robert G. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series." NBER working paper 5022, 1995. Beck, Thorsten; Levine, Ross and Loayza, Norman. "Finance and the Sources of Growth." Journal of Financial Economics, 2000, 58(1-2), pp. 261-300. Beck, Thorsten; Lundberg, Mattias and Majnoni, Giovanni. "Financial Intermediary Development and Growth Volatility: Do Intermediaries Dampen or Magnify Shocks?" World Bank Policy Research Working Paper Series No.2707, 2003. Bernanke, Ben and Gertler, Mark. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission." Journal of Economic Perspectives, 1995, 9(4), pp. 27-48. Bernanke, Ben; Gertler, Mark and Gilchrist, Simon. "The Financial Accelerator in a Quantitative Business Cycle Framework." NBER working paper No. 6455, 1998. Burns, Arthur and Mitchell, Wesley. Measuring Business Cycles. New York: NBER, 1946. Canova, Fabio. "Detrending and Business Cycle Facts." Journal of Monetary Economics, 1998, 41, pp. 475-512. Dalsgaard, Thomas; Elmeskov, Jorgen and Park, Cyn-Young. "Ongoing Changes in the Business Cycle - Evidence and Causes." SUERF Studies No. 20, 2002. Easterly, William; Islam, Roumeen and Stiglitz, Joseph E. "Shaken and Stirred: Explaining Growth Volatility," B. Pleskovic and J. E. Stiglitz, Annual Bank Conference on Development Economics. Washington D.C., 2000. Page 29 of 40 Falk, Martin and Seim, Katja. "The Impact of Information Technology on High- Skilled Labor in Services: Evidence from Firm-Level Panel Data." ZEW Discussion Paper No.99-58, 1999. Fecht, Falko. "On the Stability of Different Financial Systems." Journal of European Economic Association, 2004, 2(6), pp. 969-1014. Greene, William H. "The Behaviour of the Maximum Likelihood Estimator of Limited Dependent Variable Models in the Presence of Fixed Effects." Econometrics Journal, 2004, 7, pp. 98-119. ____. Econometric Analysis. Prentice Hall, 2003. Greenspan, Alan. "Do Efficient Financial Markets Mitigate Financial Crises?," 1999 Financial Markets Conference of the Federal Reserve Bank of Atlanta, Sea Island, Georgia, 1999. ____. "Global Challenges," C. o. F. Relations, Financial Crisis Conference. New York, 2000. Greenwald, Bruce C. and Stiglitz, Joseph E. "Financial Market Imperfections and Business Cycles." Quarterly Journal of Economics, 1993, 108(1), pp. 77-114. Haan, Wouter J. den; Ramey, Garey and Watson, Joel. "Liquidity Flows and Fragility of Business Enterprises." NBER working paper No. 7057, 1999. Hamerle, Alfred and Ronning, Gerd. "Chapter 8: Panel Analysis for Qualitative Variables," G. Arminger, C. Clogg and M. Sobel, Handbook of Statistical Modeling for the Social and Behavioral Sciences. Springer, 1994, Heckman, James J. "The Incidental Parameters Problem and the Problem of Initial Conditions in Estimating a Discrete Time-Discrete Data Stochastic Process," C. F. Manski and D. L. McFadden, Structural Analysis of Discrete Data with Econometric Applications. Cambridge: MIT Press, 1981, Hodrick, Robert J. and Prescott, Edward C. "Postwar U.S. Business Cycles: An Empirical Investigation." Journal of Money, Credit, and Banking, 1997, 29, pp. 1-16. Honore, Bo E. "Trimmed Lad and Least Squares Estimation of Truncated and Censored Regression Models with Fixed Effects." Econometrica, 1992, 60(3), pp. 533-65. La-Porta, Rafael; Lopez-de-Silane, Florencio; Shleifer, Andrei and Vishny, Robert W. "Law and Finance." Journal of political economy, 1998, 106(6), pp. 1113-55. ____. "Legal Determinants of External Finance." NBER working paper 5879, 1997. Page 30 of 40 Levine, Ross. "Bank-Based or Market-Based Financial Systems: Which Is Better?" NBER working paper No.9138, 2002. Levine, Ross and King, Robert G. "Finance and Growth: Schumpeter Might Be Right." Quarterly Journal of Economics, 1993, 108, pp. 717-38. Lopez, Jose A. and Spiegel, Mark M. "Financial Structure and Macroeconomic Performance over the Short and Long Run." Pacific Basin Working Paper series No.PB02-05, 2002. Merton, Robert C. and Bodie, Zvi. "The Design of Financial Systems: Towards a Synthesis of Function and Structure." Harvard Business School Working Paper No. 02-074, 2004. Raddatz, Claudio. "Liquidity Needs and Vulnerability to Financial Underdevelopment." World Bank Policy Research Working Paper Series No. 3161, 2003. Rajan, Raghuram and Zingales, Luigi. "Financial Systems, Industrial Structure, and Growth." Oxford Review of Economic Policy, 2001, 17(4), pp. 467-81. StataCorp. Longitudinal/Panel Data Reference Manual for Stata 9. Stata Press Publication, 2005. Stewart, Mark B. "Maximum Simulated Likelihood Estimation of Random Effects Dynamic Probit Models with Autocorrelated Errors." Stata Journal, 2006, 6(2), pp. 256-72. Stock, James H. and Watson, Mark W. "Business Cycle Fluctuations in Us Macroeconomic Time Series." NBER working paper No. 6528, 1998. Wooldridge, Jeffrey M. Econometric Analysis of Cross Section and Panel Data. MIT Press, 2002.