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The Real Effects of Financial Sector Interventions During Crises

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  • Fabian Valencia
  • Luc Laeven

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/45.

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Length: 35
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/45

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Keywords: Banking crisis; Banking sector; Capital; Credit; External shocks; Financial sector; Liquidity management; recapitalization; banking; bank recapitalization; banking crises; financial crisis; systemic banking crisis; bank recapitalizations; bank intervention; working capital; bank capital; bank liabilities; bank assets; global financial crisis; financial distress; capital expenditure; financial crises; systemic banking crises; crisis resolution; banking system; crisis countries; bank lending; banking distress; bank credit; financial integration; banking systems; subordinated debt; pre-crisis; crisis episode; macroeconomic stabilization; bank bailouts; crisis episodes; bank restructuring; bank bailout; bank loans; borderline financial crises; bank creditors; response to crisis; bank creditor; national bank; crisis intervention; banking sector development; systemic financial crises; bank claims; bank of england; bank of japan; crisis ? countries; resolution of banking crises; debt overhang; banks ? balance sheets; recession; cross-country experience; bank policy; bank transactions; bank interventions; transmission of monetary policy; investment bank; systemic financial crisis; global financial crises; bank financing; containment phase; holding company; banking institutions;

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References

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  1. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  2. Philippe Aghion & David Hemous & Enisse Kharroubi, 2009. "Credit Constraints, Cyclical Fiscal Policy and Industry Growth," NBER Working Papers 15119, National Bureau of Economic Research, Inc.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Citations

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Cited by:
  1. Mike Mariathasan & Ouarda Merrouche, 2012. "Recapitalization, credit and liquidity," Economic Policy, CEPR & CES & MSH, vol. 27(72), pages 603-646, October.
  2. Armen Hovakimian & Edward J. Kane & Luc Laeven, 2012. "Variation in Systemic Risk at US Banks During 1974-2010," NBER Working Papers 18043, National Bureau of Economic Research, Inc.
  3. Kollmann, Robert & Ratto, Marco & Roeger, Werner & in′t Veld, Jan, 2013. "Fiscal policy, banks and the financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 387-403.
  4. Robert Kollmann & Werner Roeger & Jan in'tVeld, 2012. "Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures," Working Papers ECARES ECARES 2012-006, ULB -- Universite Libre de Bruxelles.
  5. Stijn Claessens & Hui Tong & Shang-Jin Wei, 2011. "From the Financial Crisis to the Real Economy: Using Firm-level Data to Identify Transmission Channels," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  6. Allen, Franklin & Gu, Xian & Kowalewski, Oskar, 2012. "Financial crisis, structure and reform," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2960-2973.
  7. Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1220-1248.
  8. Bernal-Verdugo, Lorenzo E. & Furceri, Davide & Guillaume, Dominique, 2013. "Banking crises, labor reforms, and unemployment," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1202-1219.
  9. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2014. "Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality," Economic Modelling, Elsevier, vol. 37(C), pages 127-136.
  10. Enrique Mendoza & Marco Terrones, 2012. "An Anatomy of Credit Booms and their Demise," Working Papers Central Bank of Chile 670, Central Bank of Chile.
  11. Levintal, Oren, 2013. "The real effects of banking shocks: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 556-578.
  12. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.

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