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Demand collapse or credit crunch to firms ? evidence from the world bank's financial crisis survey in Eastern Europe

  • Nguyen, Ha
  • Qian, Rong

While there is a consensus that the 2008-2009 crisis was triggered by financial market disruptions in the United States, there is little agreement on whether the transmission of the crisis and the subsequent prolonged recession are due to credit factors or to a collapse of demand for goods and services. This paper assesses whether the primary effect of the global crisis on Eastern European firms took the form of an adverse demand shock or a credit crunch. Using a unique firm survey conducted by the World Bank in six Eastern European countries during the 2008-2009 financial crisis, the paper shows that the drop in demand for firms'products and services was overwhelmingly reported as the most damaging adverse effect of the crisis. Other"usual suspects,"such as rising debt or reduced access to credit, are reported as minor. The paper also finds that the changes in firms'sales and installed capacity are significantly and robustly correlated with the demand sensitivity of the sector in which the firms operate. However, they are not robustly correlated with various proxies for firms'credit needs.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6651.

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Date of creation: 01 Oct 2013
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Handle: RePEc:wbk:wbrwps:6651
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