The measure of credit chain distance could be capturing technological similarities across industries that buy (sell) comparable proportions of goods from (to) other industries, shown by Conley and Dupor (2003) to be related to the comovement of productivity in the US. To check this concern I add the interaction of the measures of _BUY_ and _SELL_ distances between industries of Conley and Dupor (2003) and a country’s payables financing to the baseline specification.<sup>16</sup> The main coefficient is not importantly affected and the results indicate that only industries that sell goods to similar sectors in similar proportions are significantly more correlated in countries with higher payables financing. This suggests that a higher use of trade credit increases the relevance of backward linkages as sources of comovement, consistently with the upward transmission of shocks emphasized by the credit-chain mechanism.

Industries with high degrees of external financial requirements or liquidity needs may respond more to shocks in countries with underdeveloped financial systems. Since a country’s use of trade credit may be related to the availability of formal financing associated with financial development it is necessary to control for this potential source of comovement. The degree of financial development of a country can also be related to the availability of capital, which can induce comovement across industries with similar capital intensities. All these possibilities are considered in the regression reported in column (2) that adds to the baseline specification the interaction of an industry-pair’s similarity in terms of external financing requirements (measured as in Rajan and Zingales, 1998) and liquidity needs (measured as in Raddatz, 2006) and a country’s level of financial development, and the product of an industry-pair’s similarity in terms of capital intensity (measured as in Raddatz, 2006) and a country’s (log) aggregate capital per worker. Along each dimension, the degree of similarity is computed as the absolute value of the difference between each industry’s measure. The degree of financial development is measured as the (log) average private credit to GDP ratio during 1980-2000 from ?, and capital per-worker is the average for the same period from ?(henceforth PWT). The results show that only industries with similar liquidity needs are less correlated in financially developed countries, suggesting that the increased access to financing eases the response of industries with high liquidity needs to negative shocks and reduces the resulting correlation,<sup>17</sup> but this channel does not importantly affect the coefficient associated with credit chain distance.

Sectors producing goods with similar degrees of complexity can also be relatively more correlated. For instance, Clark (1999) and Huang (2001) have documented that the response of quantities versus prices in response to a monetary policy shock vary with the stage of production. Therefore, sectors at comparable stages of production will exhibit more coordinated responses in quantities than sectors at different stages. I use the Gini coefficient of the distribution of input costs to capture the complexity/stage of production of the goods produced by an industry (see Blanchard and Kremer, 1997; Kremer, 1993) and measure the similarity of two industries in this dimension

> 16Let Φ( _i, j_ ) be the dollar value of compensation to sector _i_ for goods used in industry _j_ obtained directly from the input output tables. An industry’s fraction of the costs and demand of other sector are obtained by normalizing the Φ matrix across rows and columns to obtain _B_ ( _i, j_ ) =Φ( _i, j_ ) _/_<sup>P</sup> _k_<sup>Φ(</sup><sup>_k, j_)andΨ(</sup><sup>_i, j_)=Φ(</sup><sup>_i, j_)</sup><sup>_/_P</sup> _k_<sup>Φ(</sup><sup>_i, k_).The</sup><sup>_BUY_</sup> and _SELL_ distances correspond to the Euclidean distance of the vectors of costs and demand shares between two

> <sup><u>1</u></sup> industries and correspond to _BUY_ ( _i, j_ ) = ˆP _k_<sup>(</sup><sup>_B_(</sup><sup>_k, i_)</sup><sup>_−B_(</sup><sup>_k, j_))2 ̃ 1</sup> 2 and _SELL_ ( _i, j_ ) = ˆP _k_<sup>(Ψ(</sup><sup>_i, k_)</sup><sup>_−_Ψ(</sup><sup>_j, k_))2 ̃</sup> 2 .

> 17For the relation between liquidity needs and vulnerability to financial underdevelopment see Raddatz (2006).

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