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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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Handle: RePEc:nbr:nberwo:16528
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  1. Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
  2. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  3. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston.
  4. Maggie Chen & Laura Alfaro, 2010. "Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance," Working Papers 2010-17, The George Washington University, Institute for International Economic Policy.
  5. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
  6. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1375-1418.
  7. Gita Gopinath & Brent Neiman, 2011. "Trade adjustment and productivity in large crises," Working Papers 11-9, Federal Reserve Bank of Boston.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
  9. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  10. Blalock, Garrick & Gertler, Paul J. & Levine, David I., 2008. "Financial constraints on investment in an emerging market crisis," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 568-591, April.
  11. Stallings, Barbara & Studart, Rogerio, 2002. "Financial Regulation and Supervision in Emerging Markets. The Experience of Latin America since the Tequila Crisis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  12. Paravisini, Daniel & Rappoport, Veronica & Schnabl, Philipp & Wolfenzon, Daniel, 2010. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," Working Papers 2010-022, Banco Central de Reserva del Perú.
  13. Carmen M. Reinhart & Vincent R. Reinhart, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Working Papers 14321, National Bureau of Economic Research, Inc.
  14. repec:hrv:faseco:4784029 is not listed on IDEAS
  15. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
  16. 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.
  17. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
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