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CURRENCY CRISIS AND BALANCE SHEET CHANNEL EFFECT. The Korean Experience

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  • Francois HERMET

    ()
    (CERESUR, University of La Reunion)

Abstract

Some theoretical crisis models of third generation incorporate the "balance sheet effect" emphasized by Bernanke and Gertler (1989) and many papers since. In a crisis context this mechanism, based on asymmetric information in the credit market, describes how a currency depreciation affects domestic firms' investment. This paper proposes an empirical validation of this theoretical prediction. To this end, we study the investment behaviour of 477 Korean manufacturing firms, particularly during the 1997 Asian crisis. However, contrary to many studies in which cash flow account variable is used as proxy for entrepreneurs'' net worth, our analysis focuses on a more relevant variable, the cash stock, to measure these internal funds. The preliminary results stipulate that firms'' balance sheets in the aftermath of the Asian crisis, are more robust in explaining investment than before the crisis. It is further shown that this relationship is more relevant for small firms.

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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 6 (2003)
Issue (Month): 12 ()
Pages: 1-12

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Handle: RePEc:ebl:ecbull:eb-03f30005

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Cited by:
  1. Agustinus, Prasetyantoko, 2007. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," MPRA Paper 6501, University Library of Munich, Germany.
  2. Martial Dupaigne & Marc Y. Robert, 2006. "On the role of capital flows – or the lack thereof – in sudden stops," Revue d'économie politique, Dalloz, Dalloz, vol. 0(1), pages 79-90.

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