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Financial fragility in emerging market countries: Firm balance sheets and the productive structure

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  • Yannick Kalantzis

    (PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

Abstract

We build an overlapping generation model to study financial fragility in a two-sector small open economy. Firms are subject to a borrowing constraint and there is a currency mismatch in the balance sheets of the non-tradable sector. As a consequence, at a given point in time, multiple equilibria may arise, which makes self-fulfilling balance of payments crises possible. This state of financial fragility requires that firms producing non-tradable goods are sufficiently leveraged and that the relative size of the non-tradable sector is sufficiently large with regards to the tradable sector. We study under what conditions the endogenous evolution of these two structural factors, firm balance sheets and the productive structure, along an equilibrium path, eventually leads to a financially fragile state.

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  • Yannick Kalantzis, 2005. "Financial fragility in emerging market countries: Firm balance sheets and the productive structure," Working Papers halshs-00590808, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00590808
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590808v1
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    References listed on IDEAS

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    1. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Romain Rancière & Aaron Tornell & Frank Westermann, 2002. "Crises and growth: A re-evaluation," Economics Working Papers 852, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2003.
    5. Mr. Olivier D Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 2003/177, International Monetary Fund.
    6. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
    7. Aaron Tornell, 2003. "Crises and Growth: A Re-evaluation (September 2003)," UCLA Economics Online Papers 264, UCLA Department of Economics.
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    Cited by:

    1. Brixiova, Zuzana & Vartia, Laura & Wörgötter, Andreas, 2010. "Capital flows and the boom-bust cycle: The case of Estonia," Economic Systems, Elsevier, vol. 34(1), pages 55-72, March.

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