The Real Effects of Financial Sector Interventions During Crises

Fabian Valencia, Luc Laeven
2011 IMF Working Papers  
We collect new data to assess the importance of supply-side credit market frictions by studying the impact of financial sector recapitalization on the growth of firms in a large cross-section of 50 countries during the recent crisis. We develop an identification strategy that uses the financial crisis as a shock to credit supply and exploits exogenous variation in the degree to which firms depend on external financing for investment needs, and focus on policy interventions aimed at alleviating
more » ... med at alleviating the bank capital crunch. We find that the growth of firms dependent on external financing is disproportionately positively affected by bank recapitalization policies, and that this effect is quantitatively important and robust to controlling for other financial sector support policies. We also find that fiscal policy disproportionately boosted the growth of firms more dependent on external financing. These results provide new evidence of a quantitatively important role of credit market frictions in influencing real economic activity. JEL Classification Numbers: E44, G18, G28
doi:10.5089/9781455218974.001 fatcat:alglgqtqi5cphgb65yxkaonq2q