economy. Some of them focus on the impact of banking crises on industrial output, while others analyze the impact of other macroeconomic shocks on exports. From the first group the work of Dell’Ariccia, Detragiache, and Rajan (2008) is particularly close to our study. They show that during periods of financial distress industries that depend more on external finance are hurt disproportionately more. Kroszner, Laeven, and Klingebiel (2007) confirm these results and, additionally, find that the contraction is more pronounced in countries with a more developed financial system. From the second group, Berman (2009) concentrates on the impact of currency crises on trade and finds that impact of devaluation on exports is ambiguous. Even though, a currency crisis has a positive effect on exporters, by improving their competitiveness, it has also and adverse effect on their balance sheets by increasing the cost of their foreign denominated loans. 4 In a related study Borensztein and Panizza (2006) find that industries with higher propensity to export are hurt relatively more during periods of sovereign defaults. Given that banking crises are often accompanied by economic downturns, in a related study Braun and Larrain (2005) show that during recessions industries that depend relatively more on external finance get hurt more.

All above papers rely on the difference-in-difference methodology originally proposed by Rajan and Zingales (1998). This important contribution allowed to tackle many of the econometric shortcomings present in the finance and growth literature due to endogeneity problems. Such shortcomings affected much of the previous literature on finance and growth (King and Levine 1993, Wurgler 2000) and had to be tackled using instrumental variables (Levine 1998, Levine 1999, Levine, Loayza, and Beck 2000) or exploiting quasi-experimental design as in Jayaratne and Strahan (1996)<sup>5</sup> . The main idea of Rajan and Zingales (1998) is that industries differ in terms of their “dependence from external finance” because of industry specific technological reasons. Therefore, when a country’s financial system develops those sectors that rely more heavily on external finance to cover their investment will benefit and grow disproportionately faster. Subsequently several other papers followed a similar methodology. Fisman and Love (2003) showed that when analyzing the link between finance and growth, it is important to take into account not only the “bank finance” but also other sources of finance such as inter-firm finance. They find that where the quality of financial intermediation is low, industries relying more on trade finance tend to grow faster. Braun (2003) provides an additional dimension to understanding of the link between financial development and growth by showing that where financial markets are not sufficiently developed the use of collateral becomes particularly important as industries with higher shares of tangible assets tend to grow relatively faster. Finally, Raddatz (2006) finds that better developed financial systems reduce

> 4A similar result was pointed out for the case of Indonesia after the 1997-1998 devaluation (Blalock and Roy 2007).

> 5For a detailed and encompassing survey of the finance and growth literature the reader should refer to Levine (2004)

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