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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. Valerie Cerra & Sweta C. Saxena, 2005. "Growth Dynamics: The Myth of Economic Recovery," Macroeconomics 0508008, EconWPA.
  2. 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.).
  3. Foster, Lucia & Haltiwanger, John C. & Syverson, Chad, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," IZA Discussion Papers 1705, Institute for the Study of Labor (IZA).
  4. Eslava, Marcela & Haltiwanger Jr, John C & Kugler, Adriana D. & Kugler, Maurice, 2005. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," CEPR Discussion Papers 5267, C.E.P.R. Discussion Papers.
  5. 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.
  6. Laurence Ball & Nicolás De Roux & Marc Hofstetter, 2011. "Unemployment in Latin America and the Caribbean," DOCUMENTOS CEDE 008917, UNIVERSIDAD DE LOS ANDES-CEDE.
  7. 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.
  8. Russell Cooper & John Haltiwanger, 1990. "The Aggregate Implications of Machine Replacement: Theory and Evidence," NBER Working Papers 3552, National Bureau of Economic Research, Inc.
  9. 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.
  10. 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.
  11. Min Ouyang, 2005. "The Scarring Effect of Recessions," Computing in Economics and Finance 2005 205, Society for Computational Economics.
  12. 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.
  13. 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.
  14. Eslava, Marcela & Haltiwanger, John & Kugler, Adriana & Kugler, Maurice, 2004. "The effects of structural reforms on productivity and profitabality enhancing reallocation: evidence from Colombia," Discussion Paper Series In Economics And Econometrics 0408, Economics Division, School of Social Sciences, University of Southampton.
  15. 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.
  16. 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.
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