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

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Author Info
Hui Tong
Shang-Jin Wei
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

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/164.

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Length: 37 pages
Date of creation: 05 Aug 2009
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Handle: RePEc:imf:imfwpa:09/164

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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 ;

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