NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?

Hui Tong, Shang-Jin Wei

NBER Working Paper No. 14205
Issued in July 2008
NBER Program(s):   CF   IFM

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.

download in pdf format
   (164 K)

email paper

This paper is available as PDF (164 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14205

Users who downloaded this paper also downloaded these:
Mishkin w16609 Over The Cliff: From the Subprime to the Global Financial Crisis
Reinhart and Rogoff w13761 Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison
Mian and Sufi w13936 The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
Tong and Wei w15207 The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us