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Firm Dynamics, Investment and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994

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  • Sangeeta Pratap
  • Carlos Urrutia

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, 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.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 462.

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Date of creation: 2004
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Handle: RePEc:red:sed004:462

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Keywords: Devaluations; Balance Sheet Effects; Mexican Crisis;

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References

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  1. 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.
  2. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers 99.05, Swiss National Bank, Study Center Gerzensee.
  3. 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.
  4. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
  5. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston.
  6. 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.
  7. 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.
  8. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
  9. Ignacio Lobato & Sangeeta Pratap & Alejandro Somuano, 2004. "Debt Composition and Balance Sheet Effects of Exchange Rate Volatility in Mexico: A Firm Level Analysis," Working Papers 0405, Centro de Investigacion Economica, ITAM.
  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. Aaron Tornell & Frank Westermann & Lorenzo Martinez, 2004. "Nafta and Mexico Less-than-Steller Performance," UCLA Economics Working Papers 833, UCLA Department of Economics.
  12. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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Cited by:
  1. 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.
  2. Sangeeta Pratap & Carlos Urrutia, 2011. "Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises," Working Papers 1104, Centro de Investigacion Economica, ITAM.
  3. 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.
  4. 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).
  5. Nicolas Berman, 2009. "Financial Crises and International Trade: The Long Way to Recovery," Economics Working Papers ECO2009/23, European University Institute.
  6. 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.

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