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

Author

Listed:
  • Hui Tong

    (International Monetary Fund)

  • Shang-Jin Wei

    (Columbia University and Tsinghua University and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)

Abstract

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.

Suggested Citation

  • Hui Tong & Shang-Jin Wei, 2010. "The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis," Working Papers 172010, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:172010
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    More about this item

    Keywords

    Financial Globalization; Financial Crisis; Spillover; Liquidity Constraint;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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