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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. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration," Research Department Publications 4581, Inter-American Development Bank, Research Department.
  2. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  3. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA.
  4. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
  5. International Monetary Fund, 2011. "Unemployment in Latin America and the Caribbean," IMF Working Papers 11/252, International Monetary Fund.
  6. 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.
  7. Eslava, Marcela & Haltiwanger, John C. & Kugler, Adriana & Kugler, Maurice, 2005. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," IZA Discussion Papers 1751, Institute for the Study of Labor (IZA).
  8. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  9. Eslava, Marcela & Haltiwanger Jr, John C & Kugler, Adriana D. & Kugler, Maurice, 2004. "The Effects of Structural Reforms on Productivity- and Profitability-Enhancing Reallocation: Evidence from Colombia," CEPR Discussion Papers 4569, C.E.P.R. Discussion Papers.
  10. Bloom, Nicholas & Draca, Mirko & Van Reenen, John, 2011. "Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity," CEPR Discussion Papers 8236, C.E.P.R. Discussion Papers.
  11. Ouyang, Min, 2009. "The scarring effect of recessions," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 184-199, March.
  12. 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.
  13. 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.
  14. 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.
  15. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  16. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," Research Department Publications 4474, Inter-American Development Bank, Research Department.
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