cannot be directly computed because these variances are unobserved, so the regression in column (7) adds a proxy built using the relative variances of the output of the various industries instead. Although imperfect, this measure should properly capture the correlation coming from the inputoutput linkages, which is the source of concern. The results clearly indicate that this concern is not relevant for the main findings. Another possibility is the presence of aggregate shocks. In the model of section 3, sectoral shocks result in aggregate fluctuations because of the input-output linkages, therefore, aggregate shocks are not necessary to generate comovement. Nevertheless, the presence of truly aggregate shocks will also add a term to the linear approximation that will depend on the input-output linkages and the variance of the aggregate shock, but whose exact form will depend on specific assumptions regarding the transmission of this shock. For this reason, the regression in column (8) controls for this potential source of bias in a general manner by adding the interaction of a country’s overall volatility and the generic credit chain distance, which maximizes the potential correlation with the component of the transmission of aggregate shocks that is a function of inputoutput linkages.

# 6.4 Alternative explanations and further evidence on the mechanism

Since the measure of credit chain distance was constructed using U.S. data, one possible interpretation of the findings is that they are simply indicating that input-output linkages can better explain sectoral comovement in countries that are similar to the U.S. This is unlikely because the U.S. is not atypical in its level of trade credit use (payables financing in the U.S. is 0.13, just below the sample median of 0.14). Nevertheless, I check for this possibility by adding to the baseline specification the interaction of the generic credit-chain distance and the (log) average real GDP per capita (from PWT) during 1980-2000. The results, reported in column (1) of Table 12, show that consistently with the measurement hypothesis linkages are more important in developed countries, but this does not significantly affect the findings regarding credit chains and sectoral comovement. Column (2) shows similar results when also controlling for a country’s overall degree of volatility (as measured by the standard deviation of the growth rate of real value added during 1980-2003).

The results obtained using the ratio of short term debt to payables (see Table 8) indicate that the actual use of formal financing from financial intermediaries vis-a-vis suppliers credit partly alleviates the transmission of shocks through credit chains. Building on these results, column (3) checks whether the availability of formal financing affects the importance of the credit-chain mechanism by allowing the parameter _α_ to depend on a country’s degree of financial development, which amounts to add a triple interaction term. Surprisingly, the results indicate that the credit chain mechanism is stronger in more financially developed countries.<sup>19</sup> A possible interpretation of this finding is that financial development also increases the supply of trade credit, at least in this sample, which would be consistent with Demirguc-Kunt and Maksimovic (2001) who maintain that these sources of financing are complements. If this is the case, increasing the availability of formal 19This finding is robust to controlling for the simple interaction between financial development and GDP per capita and generic credit chain distance.

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