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Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?
Author:
Mr. Hui Tong
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Shang-Jin Weinull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 186
Language:
English
Publication Date:
01 Jul 2008
DOI:
https://doi.org/10.5089/9781451870442.001
ISBN:
9781451870442
ISSN:
1018-5941
Pages:
37
Keywords:
WP; liquidity constraint; stock price; price movement; demand sensitivity; subprime mortgage crisis
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We develop a methodology to study how the subprime crisis spills over to the real economy. Does it manifest itself primarily through reducing consumer demand or through tightening liquidity constraint on non-financial firms? Since most non-financial firms have much larger cash holding than before, they appear unlikely to face significant liquidity constraint. We propose a methodology to estimate these two channels of spillovers. We first propose an index of a firm's sensitivity to consumer demand, 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). We find that both channels are at work, but a tightened liquidity squeeze is economically more important than a reduced consumer spending in explaining cross firm differences in stock price declines.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2008: Issue 186