Firm Dynamics, Investment and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994
AbstractWe 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, subject to a cost of adjustment in capital. Investment is financed through one period loans from foreign lenders. The interest rate charged by each lender is set as 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 1991 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) a large fall in investment, (ii), a decrease in average productivity, (iii) an increase in exports, (iv) a reduction in the number of firms due to default and (v) a debt portfolio reallocation towards domestic debt. These real effects are consistent with the evidence for the Mexican crisis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 462.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Devaluations; Balance Sheet Effects; Mexican Crisis;
Other versions of this item:
- Pratap, Sangeeta & Urrutia, Carlos, 2004. "Firm dynamics, investment and debt portfolio: balance sheet effects of the Mexican crisis of 1994," Journal of Development Economics, Elsevier, vol. 75(2), pages 535-563, December.
- Sangeeta Pratap & Carlos Urrutia, 2004. "Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994," NBER Working Papers 10523, National Bureau of Economic Research, Inc.
- Sangeeta Pratap & Carlos Urrutia, 2004. "Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994," Working Papers 0406, Centro de Investigacion Economica, ITAM.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-FIN-2004-08-02 (Finance)
- NEP-MAC-2004-08-02 (Macroeconomics)
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.:
- 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, issue Win, pages 3-30.
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999.
"A Simple Model of Monetary Pollicy and Currency Crises,"
99.05, Swiss National Bank, Study Center Gerzensee.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May.
- Philippe AGHION & Philippe BACCHETTA & Abhijit BANERJEE, 1999. "A Simple Model of Monetary Policy and Currency Crises," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 9914, Université de Lausanne, Faculté des HEC, DEEP.
- Ricardo Caballero & Arvind Krishnamurthy, 2000.
"International and Domestic Collateral Constraints in a Model of Emerging Market Crises,"
NBER Working Papers
7971, National Bureau of Economic Research, Inc.
- Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
- Martin Schneider & Aaron Tornell, 2000.
"Balance SHeet Effects, Bailout Guarantees and Financial Crises,"
NBER Working Papers
8060, National Bureau of Economic Research, Inc.
- Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
- Hoyt Bleakley & Kevin Cowan, 2002.
"Corporate dollar debt and depreciations: much ado about nothing?,"
02-5, Federal Reserve Bank of Boston.
- Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
- Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," Research Department Publications 4411, Inter-American Development Bank, Research Department.
- Sangeeta Pratap & Silvio Rendón, 1996.
"Firm investment in imperfect capital markets: A structural estimation,"
Economics Working Papers
274, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1998.
- 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.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Thomas F. Cooley & Vincenzo Quadrini, 2001.
"Financial Markets and Firm Dynamics,"
American Economic Review,
American Economic Association, vol. 91(5), pages 1286-1310, December.
- Ignacio Lobato & Sangeeta Pratap & Alejandro Somuano, 2004.
"Debt Composition and Balance Sheet Effects of Exchange Rate Volatility in Mexico: A Firm Level Analysis,"
0405, Centro de Investigacion Economica, ITAM.
- 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, vol. 4(4), pages 450-471, December.
- 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.
- Aaron Tornell & Frank Westermann & Lorenzo Martinez, 2004.
"Nafta and Mexico Less-than-Steller Performance,"
UCLA Economics Working Papers
833, UCLA Department of Economics.
- Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
- Simon Gilchrist & Jae W. Sim, 2007.
"Investment During The Korean Financial Crisis: A Structural Econometric Approach,"
Boston University - Department of Economics - Working Papers Series
WP2007-001, Boston University - Department of Economics.
- Jae Sim & Simon Gilchrist, 2007. "Investment during the Korean financial crisis: A structural econometric approach," 2007 Meeting Papers 53, Society for Economic Dynamics.
- Sangeeta Pratap & Carlos Urrutia, 2011.
"Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises,"
1104, Centro de Investigacion Economica, ITAM.
- Sangeeta Pratap & Carlos Urrutia, 2012. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 336-358, July.
- Sangeeta Pratap & Carlos Urrutia, 2010. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Hunter College Department of Economics Working Papers 429, Hunter College: Department of Economics.
- Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2011.
"The relationship between investment and large exchange rate depreciations in dollarized economies,"
Journal of International Money and Finance,
Elsevier, vol. 30(7), pages 1265-1279.
- Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers 01/08, School of Economics and Business Administration, University of Navarra.
- 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).
- Miguel Fuentes & Pablo Ibarrarán, 2010. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico´s Manufacturing Sector," Working Papers Central Bank of Chile 583, Central Bank of Chile.
- Miguel Fuentes & Pablo Ibarrarán, 2006. "Firm Dynamics and Real Exchange Rate Fluctuations: Does Trade Openness Matter? Evidence from Mexico’s Manufacturing Sector," Documentos de Trabajo 312, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Nicolas Berman, 2009. "Financial Crises and International Trade: The Long Way to Recovery," Economics Working Papers ECO2009/23, European University Institute.
- Mustafa Caglayan & Rebeca Muñoz Torres, 2011.
"The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry,"
Open Economies Review,
Springer, vol. 22(4), pages 669-683, September.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.