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

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 17/2010

Review of Financial Studies, Advance Access, 26 September, 2010

39 Pages Posted: 30 Jun 2010 Last revised: 7 Sep 2022

Multiple version iconThere are 3 versions of this paper

Date Written: June 29, 2010

Abstract

This working paper was written by Hui Tong (International Monetary Fund) and Shang-Jin Wei (Columbia University, Tsinghua University, National Bureau of Economic Research and Centre for Economic Policy Research).

This paper studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007-2009 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. Interestingly, while the volume of capital flows per se has no significant effect, the composition matters a lot. In particularly, greater dependence on non-FDI capital inflows before the crisis worsens the credit crunch during the crisis, while exposure to FDI alleviates the liquidity constraint.

Keywords: Financial Globalization, Financial Crisis, Spillover, Liquidity Constraint

JEL Classification: F3, G2, G3

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis (June 29, 2010). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 17/2010, Review of Financial Studies, Advance Access, 26 September, 2010, Available at SSRN: https://ssrn.com/abstract=1632061 or http://dx.doi.org/10.2139/ssrn.1632061

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