Real effects of the subprime mortgage crisis
Subtitle: is it a demand or a finance shock?
By: Hui Tong, Shang-Jin Wei.
Contributors: Wei, Shang-Jin.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 14205; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 14205.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/8/2008.

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