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Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis

  • Pratap, Sangeeta
  • Lobato, Ignacio
  • Somuano, Alejandro

We use Mexican firm-level data to study the role of currency mismatches in exacerbating the negative effects of a devaluation in the corporate sector and to investigate what drives Mexican firms to borrow in foreign currency. Our results show that large firms and exporters tend to borrow more heavily in foreign currency. The presence of foreign currency denominated debt poses a significant risk to balance sheets at the time of devaluation. Our findings suggest that in Mexico, the balance sheet effects of a devaluation far outweigh the competitiveness effects.

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File URL: http://www.sciencedirect.com/science/article/B6W69-4B65WNM-6/2/d881d39b6f93324bb75652ea1e0eb9c4
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Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 4 (2003)
Issue (Month): 4 (December)
Pages: 450-471

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Handle: RePEc:eee:ememar:v:4:y:2003:i:4:p:450-471
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620356

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  1. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  2. Forbes, Kristin, 2002. "How Do Large Depreciations Affect Firm Performance?," Working papers 4379-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  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. 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.
  7. Martinez, Lorenza & Werner, Alejandro, 2002. "The exchange rate regime and the currency composition of corporate debt: the Mexican experience," Journal of Development Economics, Elsevier, vol. 69(2), pages 315-334, December.
  8. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
  9. 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.
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