The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis

41 Pages Posted: 11 Aug 2009 Last revised: 22 Jul 2010

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

Multiple version iconThere are 3 versions of this paper

Date Written: August 2009

Abstract

International capital flows, while potentially beneficial, are said to increase a country's vulnerability to crisis - especially if they are skewed to non-FDI types. This paper studies whether the volume and composition of capital flows affect the degree of credit crunch faced by a country's manufacturing firms during the 2007-09 crisis. Using data on 3823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. The volume of capital flows per se has no significant effect on the severity of the credit crunch. However, the composition of capital flows matters a great deal: pre-crisis exposure to non-FDI capital inflows worsens the credit crunch, while exposure to FDI alleviates the liquidity constraint. Similar results also hold when we perform an event study surrounding the Lehman Brothers bankruptcy.

Suggested Citation

Tong, Hui and Wei, Shang-Jin, The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis (August 2009). NBER Working Paper No. w15207. Available at SSRN: https://ssrn.com/abstract=1444709

Hui Tong

International Monetary Fund (IMF) ( email )

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

Shang-Jin Wei (Contact Author)

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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