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

38 Pages Posted: 19 Aug 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

Multiple version iconThere are 3 versions of this paper

Date Written: August 2009

Abstract

We study whether capital flows affect the degree of credit crunch faced by a country's manufacturing firms during the 2007-09 crisis. Examining 3823 firms in 24 emerging countries, we find that 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 has no significant effect on the severity of the credit crunch. However, the composition of capital flows matters: pre-crisis exposure to non-FDI capital inflows worsens the credit crunch, while exposure to FDI alleviates the liquidity constraint. Similar results also hold surrounding the Lehman Brothers bankruptcy

Keywords: Banking crisis, Banking sector, Capital flows, Capital inflows, Credit restraint, Cross country analysis, Emerging markets, Financial crisis, Liquidity controls, Manufacturing sector, Spillovers, Stock prices, Transition economies

Suggested Citation

Tong, Hui and Wei, Shang-Jin, The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis (August 2009). IMF Working Papers, Vol. , pp. 1-37, 2009. Available at SSRN: https://ssrn.com/abstract=1457587

Hui Tong

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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