The Real Effects of Financial Sector Interventions During Crises

36 Pages Posted: 9 Mar 2011

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Fabián Valencia

International Monetary Fund (IMF)

Date Written: March 2011

Abstract

We collect new data to assess the importance of supply-side credit market frictions by studying the impact of financial sector recapitalization packages on the growth performance of firms in a large cross-section of 50 countries during the recent crisis. We develop an identification strategy that uses the financial crisis as a shock to credit supply and exploits exogenous variation in the degree to which firms depend on external financing for investment needs, and focus on policy interventions aimed at alleviating the bank capital crunch. We find that the growth of firms dependent on external financing is disproportionately positively affected by bank recapitalization policies, and that this effect is quantitatively important and robust to controlling for other financial sector support policies. We also find that fiscal policy disproportionately boosted growth of firms more dependent on external financing. These results provide new evidence of a quantitatively important role of credit market frictions in influencing real economic activity.

Keywords: Banking crisis, Banking sector, Capital, Central banks, Credit, External shocks, Financial crisis, Financial sector, Liquidity management, Monetary policy

Suggested Citation

Laeven, Luc A. and Valencia, Fabian V., The Real Effects of Financial Sector Interventions During Crises (March 2011). IMF Working Papers, Vol. , pp. 1-35, 2011. Available at SSRN: https://ssrn.com/abstract=1780803

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabian V. Valencia

International Monetary Fund (IMF) ( email )

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

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