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

  • Luis Carranza

    ()

  • Juan M. Cayo

    (Universidad San Martín de Porres)

  • José E. Galdón-Sánchez

    ()

    (Public University of Navarra)

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.

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File URL: http://www.unav.edu/documents/10174/6546776/1132242073_wp1203.pdf
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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 12/03.

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Length: 27 pages
Date of creation: 01 Sep 2003
Date of revision:
Publication status: Published, Emerging Markets Review, 2003, vol. 4(4): pp. 472-496
Handle: RePEc:una:unccee:wp1203
Contact details of provider: Web page: http://www.unav.edu/web/facultad-de-ciencias-economicas-y-empresariales

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