Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994

Sangeeta Pratap and Carlos Urrutia ()

No 406, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: We build a partial equilibrium model of firm dynamics under exchange rate uncertainty. Firms face idiosyncratic productivity shocks and observe the current level of the real exchange rate each period. Given their current level of capital stock, firms make their export decisions and choose how much to invest. Investment is financed through one period loans from foreign lenders. The interest rate charged by each lender is set to satisfy an expected zero-profit condition. The model delivers a distribution of firms over productivity, capital stocks and debt portfolios, as well as an exit rule. We calibrate the model using data from a panel of Mexican firms, from 1989 to 2000, and analyze the effect of the 1994 crisis on these variables. As a result of the real exchange rate depreciation, the model predicts: (i) an increase in the debt burden, (ii) an increase in exports, and (iii) a large decline in investment. These real effects are consistent with the evidence for the Mexican crisis.

Keywords: Devaluation; Investment; Exports; Balance Sheet Effects (search for similar items in EconPapers)
JEL-codes: C51 E22 E32 E5 G31 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2004-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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http://ftp.itam.mx/pub/academico/inves/pratap/04-06.pdf First version, 2004 (application/pdf)

Related works:
Journal Article: Firm dynamics, investment and debt portfolio: balance sheet effects of the Mexican crisis of 1994 (2004)
Working Paper: Firm Dynamics, Investment, and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994 (2004)
Working Paper: Firm Dynamics, Investment and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994 (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:0406

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