Finance and the Business Cycle: International, Inter-Industry Evidence




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    • Braun is from the University of California, Los Angeles and Larrain is from Harvard University. We thank Robert Barro, John Campbell, Eduardo Fernandez-Arias, Oliver Hart, Alejandro Micco, Andrei Shleifer, Jeremy Stein, and participants in seminars at Harvard University, the Latin American Econometric Society, and the Latin American Finance Network for valuable comments and suggestions. This article was improved substantially by incorporating comments from an anonymous referee and from Robert Stambaugh (the editor). All remaining errors are our own.


By considering yearly production growth rates for several manufacturing industries in more than 100 countries during (roughly) the last 40 years, we show that industries that are more dependent on external finance are hit harder during recessions. The observed difference in the behavior of industries is larger when financial frictions are thought to be more prevalent, linking the result directly to the financial mechanism hypothesis. In particular, more dependent industries are more strongly affected in recessions when they are located in countries with poor financial contractibility, and when their assets are softer or less protective of financiers.