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Measuring Wealth and Financial Intermediation and Their Links to the Real Economy$
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Charles R. Hulten and Marshall B. Reinsdorf

Print publication date: 2015

Print ISBN-13: 9780226204260

Published to Chicago Scholarship Online: September 2015

DOI: 10.7208/chicago/9780226204437.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 19 September 2021

The Misfortune of Nonfinancial Firms in a Financial Crisis

The Misfortune of Nonfinancial Firms in a Financial Crisis

Disentangling Finance and Demand Shocks

Chapter:
(p.349) 11 The Misfortune of Nonfinancial Firms in a Financial Crisis
Source:
Measuring Wealth and Financial Intermediation and Their Links to the Real Economy
Author(s):

Hui Tong

Shang-Jin Wei

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226204437.003.0011

If a non-financial firm does not do well in a financial crisis, it could be attributable to either a contraction of demand for its output, or to a contraction of supply of external finance. Disentangling finance and demand shocks is difficult in the aggregate as they are observationally equivalent. They also feed on each other as a crisis unfolds. We describe a framework that explores heterogeneity across non-financial firms based on their differential ex ante vulnerability to each of the shocks to assess the relative importance of the two types of shocks, and we apply it to the 2007-2008 crisis. We find robust evidence suggesting that both channels are at work, but that a finance shock is economically more important in understanding the difficulties faced by non-financial firms.

Keywords:   financial crisis, spillover, liquidity constraint, demand contraction

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