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

August 1, 2009

Preview Citation

Format: Chicago

Hui Tong, and Shang-Jin Wei. The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis, (USA: International Monetary Fund, 2009) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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

Subject: Asset prices, Capital flows, Capital inflows, External debt, Financial crises

Keywords: Capital flow, Credit crunch, Crisis exposure, FDI openness, Market index, Portfolio inflow, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/164
Stock No:

WPIEA2009164
ISBN:

9781451873115
ISSN:

1018-5941

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