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Floating without flotations-the exchange rate and the Mexican stock market: 1995-2001

  • Jes�s Mu�oz

    (Instituto de Investigaciones Económicas y Empresariales (ININEE), Universidad Michoacana de San Nicolás de Hidalgo, Michoacán, México)

  • P. Nicholas Snowden

    (Department of Economics, Lancaster University Management School, Lancaster, UK)

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    Pegged exchange rates in capital importing countries partially 'socialised' the risks of international borrowing. A corollary of managed floating, therefore, is a reallocation of risk bearing to private capital markets. Equity finance offers explicit risk sharing but Mexican experience since 1995 confirms that it may not expand spontaneously under a floating regime, despite buoyant international conditions. As an explanation for this disappointing outcome, the analysis highlights the implications of managed floating for equity demand when corporate debt is high. Policy must recognize that while firms need to reduce gearing, investors may not be attracted to the shares of indebted companies. Copyright © 2006 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 18 (2006)
    Issue (Month): 3 ()
    Pages: 299-318

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    Handle: RePEc:wly:jintdv:v:18:y:2006:i:3:p:299-318
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    1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    2. 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.
    3. Solnik, B H, 1974. "The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure," Journal of Finance, American Finance Association, vol. 29(2), pages 365-78, May.
    4. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "A Re-Examination of Exchange Rate Exposure," NBER Working Papers 8128, National Bureau of Economic Research, Inc.
    5. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
    6. Ronald I. McKinnon & Huw Pill, 1998. "International Overborrowing: A Decomposition of Credit and Currency Risks," Working Papers 98004, Stanford University, Department of Economics.
    7. 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.
    8. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1979. "Exchange rates in the short run : Some further results," European Economic Review, Elsevier, vol. 12(4), pages 395-402, October.
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