This paper examines how devaluations affect the relative costs of labor and capital and therefore influence production, profitability, investment, and stock returns for firms in the 'crisis' country as well as competitors in the rest of the world. After developing these ideas in a small, open-economy model, the paper performs a series of empirical tests using information for about 1,100 firms in 10 commodity industries between 1996 and 2000. The empirical tests support the model's main predictions: 1) Immediately after devaluations, commodity firms in the crisis country have output growth rates about 10%-20% higher than competitors in other countries; 2) Immediately after devaluations, commodity firms in the crisis country have operating-profit growth rates about 15%-25% higher than competitors in other countries; 3) The effect of devaluations on fixed capital investment and stock returns (and therefore expected long-run output and profits) is determined by capital/labor ratios and changes in the cost of capital. For example, crisis-country firms have higher rates of capital growth and better stock performance after devaluations if they had lower capital/labor ratios and there was no substantial increase in their interest rates.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9053.
Length: Date of creation: Jul 2002 Date of revision: Handle: RePEc:nbr:nberwo:9053
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Find related papers by JEL classification: F1 - International Economics - - Trade F2 - International Economics - - International Factor Movements and International Business
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Linda Goldberg & Joseph Tracy, 2000.
"Exchange Rates and Local Labor Markets,"
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Kathryn M.E. Dominguez & Linda L. Tesar, 2001.
"Exchange Rate Exposure,"
NBER Working Papers
8453, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fixing for Your Life,"
NBER Working Papers
8006, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Reinhart, Carmen & Calvo, Guillermo, 2001.
"Fixing for your life,"
MPRA Paper
13873, University Library of Munich, Germany.
[Downloadable!]
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