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Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. The authors find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle.
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