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Firm dynamics, investment and debt portfolio: balance sheet effects of the Mexican crisis of 1994

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  • Pratap, Sangeeta
  • Urrutia, Carlos

Abstract

We build a partial equilibrium model of firm dynamics under exchange rate uncertainty. Firms face idiosyncratic productivity shocks and observe the current level of the real exchange rate each period. Given their current level of capital stock, firms make their export decisions and choose how much to invest. Investment is financed through one period loans from foreign lenders. The interest rate charged by each lender is set to satisfy an expected zero-profit condition. The model delivers a distribution of firms over productivity, capital stocks and debt portfolios, as well as an exit rule. We calibrate the model using data from a panel of Mexican firms, from 1989 to 2000, and analyze the effect of the 1994 crisis on these variables. As a result of the real exchange rate depreciation, the model predicts: (i) an increase in the debt burden, (ii) an increase in exports, and (iii) a large decline in investment. These real effects are consistent with the evidence for the Mexican crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 75 (2004)
Issue (Month): 2 (December)
Pages: 535-563

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Handle: RePEc:eee:deveco:v:75:y:2004:i:2:p:535-563

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  1. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(3), pages 513-548, December.
  2. Aaron Tornell & Frank Westermann & Lorenzo Martinez, 2004. "Nafta and Mexico Less-than-Steller Performance," UCLA Economics Working Papers, UCLA Department of Economics 833, UCLA Department of Economics.
  3. Pratap, Sangeeta & Lobato, Ignacio & Somuano, Alejandro, 2003. "Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis," Emerging Markets Review, Elsevier, Elsevier, vol. 4(4), pages 450-471, December.
  4. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers, Federal Reserve Bank of Boston 02-5, Federal Reserve Bank of Boston.
  5. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 91(5), pages 1286-1310, December.
  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, Elsevier, vol. 20(2), pages 177-181.
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  8. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71, pages 883-913, 07.
  9. Sangeeta Pratap & Silvio Rendon, 2003. "Firm Investment in Imperfect Capital Markets: A Structural Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 513-545, July.
  10. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  11. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 728-738, May.
  12. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 3-30.
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Cited by:
  1. Fuentes, Miguel & Ibarrarán, Pablo, 2009. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector," IZA Discussion Papers 4494, Institute for the Study of Labor (IZA).
  2. Sangeeta Pratap & Carlos Urrutia, 2010. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Economics Working Paper Archive at Hunter College, Hunter College Department of Economics 429, Hunter College Department of Economics.
  3. Nicolas Berman, 2009. "Financial Crises and International Trade: The Long Way to Recovery," Economics Working Papers, European University Institute ECO2009/23, European University Institute.
  4. Caglayan, Mustafa & Muñoz Torres, Rebeca I., 2008. "The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry," The Warwick Economics Research Paper Series (TWERPS) 846, University of Warwick, Department of Economics.
  5. Jae Sim & Simon Gilchrist, 2007. "Investment during the Korean financial crisis: A structural econometric approach," 2007 Meeting Papers, Society for Economic Dynamics 53, Society for Economic Dynamics.
  6. Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 01/08, School of Economics and Business Administration, University of Navarra.

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