Financial fragility in emerging market countries: Firm balance sheets and the productive structure
Abstract
We build an overlapping generation model to study financial fragility in a two-sector small open economy. Firms are subject to a borrowing constraint and there is a currency mismatch in the balance sheets of the non-tradable sector. As a consequence, at a given point in time, multiple equilibria may arise, which makes self-fulfilling balance of payments crises possible. This state of financial fragility requires that firms producing non-tradable goods are sufficiently leveraged and that the relative size of the non-tradable sector is sufficiently large with regards to the tradable sector. We study under what conditions the endogenous evolution of these two structural factors, firm balance sheets and the productive structure, along an equilibrium path, eventually leads to a financially fragile state.Download Info
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Paper provided by HAL in its series PSE Working Papers with number halshs-00590808.Length:
Date of creation: May 2005
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Handle: RePEc:hal:psewpa:halshs-00590808
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00590808
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Keywords: balance of payments crises ; financial fragility ; foreign currency debt ; borrowing constraint ; multiple equilibria;References
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- Brixiova, Zuzana & Vartia, Laura & Wörgötter, Andreas, 2010. "Capital flows and the boom-bust cycle: The case of Estonia," Economic Systems, Elsevier, vol. 34(1), pages 55-72, March.
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