Did Unconventional Interventions Unfreeze the Credit Market? Some International Evidence

Abstract

When the credit market was frozen in spite of a low nominal interest rate during the 2008-2010 global financial crisis, many governments undertook a set of unconventional measures, such as debt guarantee, bank recapitalization, and purchase of bank toxic assets. Did these unconventional interventions achieve their intended policy objective of unfreezing the credit market? This paper pursues a systematic investigation of this question. We first construct a novel and comprehensive dataset of 231 interventions for 15 countries from August 2008 to July 2010 and identify a subset of those most likely containing elements of a surprise based on the media coverage during that period. We then use stock price data on 6344 listed non-financial firms in those countries and explore heterogeneous responses to the interventions across firms in different sectors. We find that the stock prices of firms increased when the interventions were implemented, particularly for firms with large intrinsic liquidity needs for working capital. This positive and differential effect was more pronounced if the banking sector experienced a higher abnormal return around an intervention date. Moreover, the results become even stronger for the subset of intervention announcements that are more likely to contain surprise components. These findings suggest that unconventional interventions have alleviated the liquidity constraint faced by non-financial firms. However, relative to the severity of the financial crisis, the quantitative effect of any given interventions was limited.