Demand Collapse or Credit Crunch to Firms? Evidence from the World Bank's Financial Crisis Survey in Eastern Europe

27 Pages Posted: 20 Apr 2016

See all articles by Ha Nguyen

Ha Nguyen

International Monetary Fund (IMF)

Rong Qian

World Bank

Date Written: October 1, 2013

Abstract

While there is a consensus that the 2008-2009 crisis was triggered by financial market disruptions in the United States, there is little agreement on whether the transmission of the crisis and the subsequent prolonged recession are due to credit factors or to a collapse of demand for goods and services. This paper assesses whether the primary effect of the global crisis on Eastern European firms took the form of an adverse demand shock or a credit crunch. Using a unique firm survey conducted by the World Bank in six Eastern European countries during the 2008-2009 financial crisis, the paper shows that the drop in demand for firms' products and services was overwhelmingly reported as the most damaging adverse effect of the crisis. Other "usual suspects," such as rising debt or reduced access to credit, are reported as minor. The paper also finds that the changes in firms'sales and installed capacity are significantly and robustly correlated with the demand sensitivity of the sector in which the firms operate. However, they are not robustly correlated with various proxies for firms' credit needs.

Keywords: Economic Theory & Research, Microfinance, Access to Finance, Markets and Market Access, Banks & Banking Reform

Suggested Citation

Nguyen, Ha and Qian, Rong, Demand Collapse or Credit Crunch to Firms? Evidence from the World Bank's Financial Crisis Survey in Eastern Europe (October 1, 2013). World Bank Policy Research Working Paper No. 6651, Available at SSRN: https://ssrn.com/abstract=2338261

Ha Nguyen (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Rong Qian

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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