Real Effects of the 2007-08 Financial Crisis Around the World
30 Pages Posted: 20 Mar 2009
Date Written: March 18, 2009
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: Suggested Citation