IDEAS home Printed from https://ideas.repec.org/p/una/unccee/wp1203.html
   My bibliography  Save this paper

Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis

Author

Listed:
  • Luis Carranza
  • Juan M. Cayo

    (Universidad San Martín de Porres)

  • José E. Galdón-Sánchez

    (Public University of Navarra)

Abstract

This paper analyzes the impact of the exchange rate volatility on the performance of the Peruvian economy using financial information from 163 non-financial listed firms. We find evidence that, for firms holding dollar-denominated debt, investment decisions are negatively affected by real exchange rate depreciation. The reasons behind this result are: (i) the high degree of liability dollarization and currency mismatch that create the conditions for a balance sheet effect and a financial stress in the aftermath of a currency depreciation, (ii) the strong bank-lending channel that follows and reinforces the balance sheet effect, (iii) the domestic demand shrinkage that affects severely the firms sales, and (iv) the relatively small and poorly diversified export sector.

Suggested Citation

  • Luis Carranza & Juan M. Cayo & José E. Galdón-Sánchez, 2003. "Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis," Faculty Working Papers 12/03, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp1203
    as

    Download full text from publisher

    File URL: http://www.unav.edu/documents/10174/6546776/1132242073_wp1203.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    3. Disyatat, Piti, 2004. "Currency crises and the real economy: The role of banks," European Economic Review, Elsevier, vol. 48(1), pages 75-90, February.
    4. Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
    5. Linda Goldberg & Joseph Tracy, 2000. "Exchange Rates and Local Labor Markets," NBER Chapters, in: The Impact of International Trade on Wages, pages 269-307, National Bureau of Economic Research, Inc.
    6. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    7. Kristin J Forbes, 2002. "How Do Large Depreciations Affect Firm Performance?," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 214-238.
    8. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    9. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, May.
    10. Pierre-Olivier Gourinchas, 1999. "Exchange Rates and Jobs: What Do We Learn from Job Flows?," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 153-222, National Bureau of Economic Research, Inc.
    11. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    12. Stephen Bond & Anke Hoeffler, 2001. "GMM Estimation of Empirical Growth Models," Economics Series Working Papers 2001-W21, University of Oxford, Department of Economics.
    13. Stephen Bond & Julie Elston & Jacques Mairesse & Benoit Mulkay, 1997. "Financial factors and investment in Belgium, France, German and the UK: A comparison using company panel data," IFS Working Papers W97/08, Institute for Fiscal Studies.
    14. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    15. Carranza, Luis J. & Cayo, Juan M. & Galdon-Sanchez, Jose E., 2003. "Exchange rate volatility and economic performance in Peru: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 472-496, December.
    16. 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.
    17. Robert C. Feenstra, 2000. "The Impact of International Trade on Wages," NBER Books, National Bureau of Economic Research, Inc, number feen00-1, March.
    18. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 503-535.
    19. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    20. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    21. Arteta, Carlos, 2002. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," Center for International and Development Economics Research, Working Paper Series qt9jb1p0jg, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    22. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    23. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    24. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
    25. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    26. Stephen Bond & Anke Hoeffler & Jonathan Temple, 2001. "GMM Estimation of Empirical Growth Models," Economics Papers 2001-W21, Economics Group, Nuffield College, University of Oxford.
    27. Rupa Duttagupta & Antonio Spilimbergo, 2004. "What Happened to Asian Exports During the Crisis?," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1-4.
    28. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    29. Douglas W. Diamond, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 709-737.
    30. Feenstra, Robert C. (ed.), 2000. "The Impact of International Trade on Wages," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226239637, December.
    31. Roger E. A. Farmer, 1985. "Implicit Contracts with Asymmetric Information and Bankruptcy: The Effect of Interest Rates on Layoffs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 427-442.
    32. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    33. Betts, Caroline & Devereux, Michael B., 2000. "Erratum to "Exchange rate dynamics in a model of pricing-to-market": [Journal of International Economics 50 (2000) 214-244]," Journal of International Economics, Elsevier, vol. 52(1), pages 207-208, October.
    34. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
    35. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luis Carranza, "undated". "Debt Composition and Balance Sheet Effects of Exchange and Interest Rates Volatility: Case of Peru," DCBSLA Series 6, Inter-American Development Bank, Research Department.
    2. Juan Carlos Echeverry & Roberto Steiner & Leopoldo Ferguson, "undated". "Hell, Heaven or Hedged: Debt Devaluation and Firm Investment in Colombia," DCBSLA Series 5, Inter-American Development Bank, Research Department.
    3. Eduardo Levy-Yeyati, "undated". "Financial Dollarization and Debt Deflation Under a Currency Board: The Case of Argentina," DCBSLA Series 3, Inter-American Development Bank, Research Department.
    4. Echeverry, Juan Carlos & Fergusson, Leopoldo & Steiner, Roberto & Aguilar, Camila, 2003. "'Dollar' debt in Colombian firms: are sinners punished during devaluations?," Emerging Markets Review, Elsevier, vol. 4(4), pages 417-449, December.
    5. Yongfu Huang, 2011. "Private investment and financial development in a globalized world," Empirical Economics, Springer, vol. 41(1), pages 43-56, August.
    6. Galiani, Sebastian & Levy Yeyati, Eduardo & Schargrodsky, Ernesto, 2003. "Financial dollarization and debt deflation under a currency board," Emerging Markets Review, Elsevier, vol. 4(4), pages 340-367, December.
    7. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    8. Nucci, Francesco & Pozzolo, Alberto Franco, 2010. "The exchange rate, employment and hours: What firm-level data say," Journal of International Economics, Elsevier, vol. 82(2), pages 112-123, November.
    9. Jacques Mairesse & Bronwyn H. Hall & Benoît Mulkay, 1999. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," Annals of Economics and Statistics, GENES, issue 55-56, pages 27-67.
    10. Maurice J.G. Bun & Sarafidis, V., 2013. "Dynamic Panel Data Models," UvA-Econometrics Working Papers 13-01, Universiteit van Amsterdam, Dept. of Econometrics.
    11. Camila Casas & Sergii Meleshchuk & Yannick Timmer, 2020. "The Dominant Currency Financing Channel of External Adjustment," Borradores de Economia 1111, Banco de la Republica de Colombia.
    12. Charles Engel, 2003. "Expenditure Switching and Exchange-Rate Policy," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 231-300, National Bureau of Economic Research, Inc.
    13. Simplice A. Asongu & Sara Le Roux & Vanessa S. Tchamyou, 2019. "Essential information sharing thresholds for reducing market power in financial access: a study of the African banking industry," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(1), pages 34-50, March.
    14. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
    15. Boateng, Agyenim & Asongu, Simplice & Akamavi, Raphael & Tchamyou, Vanessa, 2018. "Information asymmetry and market power in the African banking industry," Journal of Multinational Financial Management, Elsevier, vol. 44(C), pages 69-83.
    16. Santiago L.E. Acosta Ormaechea, 2007. "A Small Open Economy Model with Currency Mismactches and a Financial Accelerator Mechanism," DEGIT Conference Papers c012_035, DEGIT, Dynamics, Economic Growth, and International Trade.
    17. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2009. "Exchange rate and inflation dynamics in dollarized economies," Journal of Development Economics, Elsevier, vol. 89(1), pages 98-108, May.
    18. Dekle, Robert & Ryoo, Heajin H., 2007. "Exchange rate fluctuations, financing constraints, hedging, and exports: Evidence from firm level data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 437-451, December.
    19. Kim, Yun Jung, 2016. "Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea," Emerging Markets Review, Elsevier, vol. 26(C), pages 64-79.
    20. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2009. "What is Driving Reserve Accumulation? A Dynamic Panel Data Approach," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 861-877, September.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:una:unccee:wp1203. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.unav.edu/web/facultad-de-ciencias-economicas-y-empresariales .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.