The Misfortune of Non-financial Firms in a Financial Crisis: Disentangling Finance and Demand Shocks
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Chapter in forthcoming NBER book Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, Charles Hulten and Marshall Reinsdorf, editors
If a non-financial firm does not do well in a financial crisis, it could be due to either a contraction of demand for its output or a contraction of supply of external finance. We propose a framework to assess the relative importance of the two shocks, and 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 plight of non-financial firms.
This paper was revised on April 17, 2014
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