Consumption risk sharing over the business cycle: The role of small firm‘s access to credit markets

Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We \u85nd that small \u85rmsaccess to credit markets plays an important role in explaining this stylized fact: business cycle uc-tuations in aggregate risk sharing are more pronounced in states in which small rms account for a large share income or employment. In addition, better access of small \u85rms to credit markets in the wake of state-level bank-ing deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small \u85rms to smooth income in the face of adverse cash-ows shocks to their business. They suggest a major additional bene\u85t from banking dereg-ulation: access to bank credit has become more reliable and is more easily available when households and \u85rms need it most urgently in economic downturns