Does Financial Development Volatility Affect Industrial Growth Volatility?

This paper investigates whether volatility of financial development plays a role in determining industrial growth volatility. Three key findings emerge. First, overwhelming evidence supports the view that more volatile financial development raises the industrial volatility in sectors that rely more on external liquidity. Second, the harmful effect of financial volatility on industrial volatility mainly works through the increase in fluctuations of the growth of real value added per firm and the number of firms, with the former effect more prominent. Third, both the volatilities of the banking sector and the stock market positively associate with higher industrial growth volatility, which contrasts sharply with the finding in the existing literature that financial structure generally does not matter. JEL Classification: E32, G2, O16 Key words: Financial Development, Financial Volatility, Industrial Growth Volatility