Real Effects of the Subprime Mortgage Crisis : Is it a Demand or a Finance Shock? / Hui Tong & Shang-Jin Wei.

Format:

Book

Author/Creator:

Tong, Hui, author.

Wei, Shang-Jin, author.

Series:

Working Paper Series (National Bureau of Economic Research) ; no. w14205.

NBER working paper series ; no. w14205

Language:

English

Subjects (All):

Financial crises.

Liquidity (Economics).

Physical Description:

1 online resource (49 pages) : illustrations (black and white).

Place of Publication:

Cambridge, Massachusetts : National Bureau of Economic Research, 2008.

Summary:

We develop a methodology to study whether and how a financial-sector crisis can spill over to the real economy, and apply it to the case of the ongoing subprime mortgage crisis. If there is a spillover, does it manifest itself primarily by reducing consumer confidence and consumer demand? Is there also a supply-side channel through a tightened liquidity constraint faced by non-financial firms? Since most firms appear to have much larger cash holdings than in the past, some suggest that a liquidity constraint is not likely to be a significant factor for non-financial firms. We propose a methodology to estimate the importance of these two channels for spillovers. We first propose an index of a firm's sensitivity to a shock to consumer confidence, based on its response to the 9/11 shock in 2001. We then construct a separate firm-level index on financial constraint based on Whited and Wu (2006). As a robustness check, we also construct an alternative sector-level index of a firm's intrinsic demand for external finance, based on the work of Rajan and Zingales (1998). We find robust evidence suggesting that both channels are at work, but that a tightened liquidity squeeze appears to be economically more important than reduced consumer confidence or spending in explaining cross-firm differences in stock price declines.

Notes:

Description based on publisher supplied metadata and other sources.