Real Effects of the 2007-08 Financial Crisis Around the World

30 Pages Posted: 20 Mar 2009

See all articles by Hui Tong

Hui Tong

International Monetary Fund (IMF)

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: March 18, 2009

Abstract

This paper proposes a simple framework (a) to quantify the importance of the finance shock to non-financial firms in 45 countries by exploring cross-firm heterogeneity in dependence on external finance for working capital and investment, and (b) to study whether and how the type of financial system, the nature of monetary and exchange rate regime, and the magnitude of pre-crisis credit expansion affect the transmission of the finance shocks internationally by exploring cross-country heterogeneity in these dimensions. We find that the decline of stock price was more severe for firms with larger ex ante sensitivity to external finance over the period from July 2007 to August 2008. This finding thus provides convincing evidence that non-financial firms have indeed suffered from a strongly negative supply-of-finance shock. Moreover, this pattern is particularly pronounced in countries with rapid pre-crisis credit expansion and a monetary policy of inflation targeting.

Keywords: financial crisis, spillover, liquidity constraint

JEL Classification: F3, G2, G3

Suggested Citation

Tong, Hui and Wei, Shang-Jin, Real Effects of the 2007-08 Financial Crisis Around the World (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1363819 or http://dx.doi.org/10.2139/ssrn.1363819

Hui Tong (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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