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

Sangeeta Pratap and Carlos Urrutia

No 462, 2004 Meeting Papers from Society for Economic Dynamics

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, subject to a cost of adjustment in capital. Investment is financed through one period loans from foreign lenders. The interest rate charged by each lender is set as 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 1991 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) a large fall in investment, (ii), a decrease in average productivity, (iii) an increase in exports, (iv) a reduction in the number of firms due to default and (v) a debt portfolio reallocation towards domestic debt. These real effects are consistent with the evidence for the Mexican crisis.

Keywords: Devaluations; Balance Sheet Effects; Mexican Crisis (search for similar items in EconPapers)
JEL-codes: E22 F34 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-fin and nep-mac
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Citations: View citations in EconPapers (23)

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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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