Questions On Non Financial Firms

Questions On Non Financial Firms

1. Introduction

The 2007–2008 crisis started off in August 2007 as a subprime mortgage crisis primarily concentrated in the United States but quickly metamorphosized into a global financial crisis where financial institutions teeter on the edge of bankruptcy in many countries in addition to the United States. A global economic crisis ensues in which nonfinancial firms around the world appear to spiral downward as well. A key potential contributor to the plight of the non–financial firms is the financial crisis itself, in the form of a negative shock to the supply of external finance needed by non–financial firms. However, as the two quotes by some leading policymakers and scholars at the beginning of the paper indicate, the idea that non–financial firms suffer from a strongly negative supply–of–finance shock is not universally shared. In addition, if non–financial firms do not do well, there can certainly be other causes, such as a contraction of demand for their products.

This paper has three objectives. First, it aims to develop a simple framework that can capture and quantify the relative importance of the finance shock to the economic health of non–financial firms. Second, in a cross–country context, it aims to investigate whether the responsiveness of the real economy to a given finance shock varies by country features that the literature suggests that could matter, such as the type of a financial system, the nature of a monetary and exchange rate regime, or the extent

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