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Scarring Recessions and Credit Constraints: Evidence from Colombian Firm Dynamics

  • Marcela Eslava

    ()

  • Arturo Galindo

    ()

  • Marc Hofstetter

    ()

  • Alejandro Izquierdo

    ()

Using a rich dataset of Colombian manufacturing establishments between 1995 and 2004, we illustrate potential scarring effects of recessions operating through credit constraints. In contrast with the view that recessions are times of cleansing, we find that financially constrained businesses might be forced to exit the market during recessions even if they are highly productive. For instance, during recessions, an establishment with TFP at the lowest 10th percentile but not facing credit constraints has the same exit probability as a constrained plant with TFP at least as high as the 39th percentile. The gap is much smaller during expansions. The contribution of the paper is threefold. First, it evaluates the role played by credit constraints in explaining firm dynamics throughout the business cycle, a phenomenon the literature has dealt with mostly from a theoretical standpoint. Second, it sheds light on the implied long-run consequences of exits induced by lack of credit on efficiency. Finally, it is the only study we know of providing direct evidence to judge the empirical merits of proposed micro foundations behind the long-run consequences of crises.

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File URL: http://economia.uniandes.edu.co/publicaciones/dcede2010-27.pdf
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Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 007711.

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Length: 43
Date of creation: 31 Aug 2010
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Handle: RePEc:col:000089:007711
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  1. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration," NBER Working Papers 14026, National Bureau of Economic Research, Inc.
  3. Chang-Tai Hsieh & Jonathan A. Parker, 2006. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," NBER Working Papers 12104, National Bureau of Economic Research, Inc.
  4. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  5. Barlevy, Gadi, 2003. "Credit market frictions and the allocation of resources over the business cycle," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1795-1818, November.
  6. Alejandro Izquierdo & Ernesto Talvi & Guillermo A Calvo, 2006. "Phoenix miracles in emerging markets: recovering without credit from systemic financial crises," BIS Working Papers 221, Bank for International Settlements.
  7. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2010. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 378-391, May.
  8. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The effects of structural reforms on productivity and profitability enhancing reallocation: Evidence from Colombia," Economics Working Papers 763, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  10. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  11. International Monetary Fund, 2011. "Unemployment in Latin America and the Caribbean," IMF Working Papers 11/252, International Monetary Fund.
  12. Abdul Abiad & Petya Koeva Brooks & Irina Tytell & Daniel Leigh & Ravi Balakrishnan, 2009. "What’S the Damage? Medium-Term Output Dynamics After Banking Crises," IMF Working Papers 09/245, International Monetary Fund.
  13. Nicholas Bloom & Mirko Draca & John Van Reenen, 2011. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," NBER Working Papers 16717, National Bureau of Economic Research, Inc.
  14. Ouyang, Min, 2009. "The scarring effect of recessions," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 184-199, March.
  15. Matías Braun & Borja Larrain, 2005. "Finance and the Business Cycle: International, Inter-Industry Evidence," Journal of Finance, American Finance Association, vol. 60(3), pages 1097-1128, 06.
  16. Gibson, John K & Harris, Richard I D, 1996. "Trade Liberalisation and Plant Exit in New Zealand Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 521-29, August.
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