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What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

  • Sebnem Kalemli-Ozcan
  • Herman Kamil
  • Carolina Villegas-Sanchez

We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of credit by banks (lending channel). We find that during twin crises, domestic exporters holding un-hedged foreign currency debt decrease investment while foreign exporters with better access to credit increase investment, in spite of their un-hedged foreign currency debt. We do not find such a differential effect under pure currency crises. Using firm-bank matched data during global financial crisis, we show that both domestic and foreign-owned firms experienced a decline in bank credit from affected banks however, foreign-owned firms substituted the lost credit.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16528.

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Date of creation: Nov 2010
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Publication status: published as Sebnem Kalemli-Ozcan & Herman Kamil & Carolina Villegas-Sanchez, 2016. "What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?," Review of Economics and Statistics, vol 98(4), pages 756-769.
Handle: RePEc:nbr:nberwo:16528
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  14. Reinhart, Carmen & Reinhart, Vincent, 2008. "From Capital Flow Bonanza to Financial Crash," MPRA Paper 11866, University Library of Munich, Germany.
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