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Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis

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Author Info
Luis Carranza ()
Juan M. Cayo (Universidad San Martín de Porres)
José E. Galdón-Sánchez () (Public University of Navarra)

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Abstract

This paper analyzes the impact of the exchange rate volatility on the performance of the Peruvian economy using financial information from 163 non-financial listed firms. We find evidence that, for firms holding dollar-denominated debt, investment decisions are negatively affected by real exchange rate depreciation. The reasons behind this result are: (i) the high degree of liability dollarization and currency mismatch that create the conditions for a balance sheet effect and a financial stress in the aftermath of a currency depreciation, (ii) the strong bank-lending channel that follows and reinforces the balance sheet effect, (iii) the domestic demand shrinkage that affects severely the firms sales, and (iv) the relatively small and poorly diversified export sector.

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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 12/03.

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Length: 27 pages pages
Date of creation: Sep 2003
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Publication status: Published, Emerging Markets Review, 2003, vol. 4(4): pp. 472-496
Handle: RePEc:una:unccee:wp1203

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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  19. Pierre-Olivier Gourinchas, 1998. "Exchange Rates and Jobs: What Do We Learn from Job Flows?," NBER Working Papers 6864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Saki Bigio & Jorge Salas, 2006. "Non-Linear Effects of Monetary Policy and Real Exchange Rate Shocks in Partially Dollarized Economies: An Empirical Study for Peru," Working Papers 2006-008, Banco Central de Reserva del Perú. [Downloadable!]
  2. Luis Carranza & José E. Galdón-Sánchez & Javier Gómez Biscarri, 2004. "Exchange Rate and Inflation Dynamics in Dollarized Economies," Faculty Working Papers 10/04, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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