Microeconomic flexibility is at the core of economic growth in modern market economies because it... more Microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative-destruction, The main reason why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists object to the hypothesis that labor market
We estimate a reduced form model for the daily dynamics of the nominal spot exchange rate in Chil... more We estimate a reduced form model for the daily dynamics of the nominal spot exchange rate in Chile. The model does reasonably well in explaining the long and short run dynamics for the peso-dollar exchange rate for the period 2001-2006. In addition, we extend the model to evaluate the effects of the foreign investment of pension funds, foreign exchange rate
Page 1. Bond Markets in Latin aMerica On the Verge of a Big Bang? edited by Eduardo Borensztein, ... more Page 1. Bond Markets in Latin aMerica On the Verge of a Big Bang? edited by Eduardo Borensztein, Kevin Cowan, Barry Eichengreen, and Ugo Panizza Page 2. Bond Markets in Latin America Page 3. Page 4. Bond Markets in Latin America: On the Verge of a Big Bang? ...
This paper tests a specific channel through which institutions affect output per capita: the role... more This paper tests a specific channel through which institutions affect output per capita: the role of institutions in firm-level division of production. We argue that weaker institutions increase transaction costs, including those incurred by a firm when dealing with suppliers of intermediate goods. Firms respond to these higher costs by substituting intermediate goods produced within the firm for those externally
Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging ... more Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging markets. Although this risk is microeconomic in nature, the evidence advanced thus far has taken the form of macro correlations. We evaluate this mechanism empirically at the micro level by using a database of over 3000 publicly traded firms from fifteen emerging markets. We
Why do firms and banks hold foreign currency denominated liabilities? Cowan and Do argue that for... more Why do firms and banks hold foreign currency denominated liabilities? Cowan and Do argue that foreign currency debt, by altering the effect of a devaluation on output, has a disciplining effect when the Central Bank�s objectives differ from the social optimum. However, under imperfect information, bad priors about the Central Bank induce excess dollarization of liabilities, which in turn limits
Latin American economies are exposed to substantial external vulnerability. Domestic imbalances a... more Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that
Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of... more Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of economic growth in modern market economies. The main reason for why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, other institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its
Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging ... more Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging markets. Although this risk is microeconomic in nature, the evidence advanced thus far has taken the form of macro correlations. We evaluate this mechanism empirically at the micro level by using a database of over 3000 publicly traded firms from fifteen emerging markets. We measure the risk of short-term exposure by estimating, at the firm level, the effect on investment of the interaction of short-term exposure and aggregate capital flows. This effect is (statistically) zero, contrary to the prediction of the maturity-mismatch hypothesis. This conclusion is robust to using a variety of different estimators, alternative measures of capital flows, and controls for devaluation effects and access to international capital. We do find evidence that short-termexposed firms pay higher financing costs and liquidate assets at "fire sale" prices, but not that this reduction in net worth translates into a drop in investment.
Much has been written recently about the problems for emerging markets that might result from a m... more Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income ‡ows) denominated in local currency. In particular, several models, developed in the aftermath of …nancial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth e¤ect, o¤set the expansionary competitiveness e¤ect. Assessing which e¤ect dominates is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-…nancial …rms in …ve Latin American countries. We estimate, at the …rm level, the reduced-form e¤ect on investment of holding foreign-currencydenominated debt during an exchange-rate realignment. We consistently …nd that, contrary to the predicted sign of the net-worth e¤ect, …rms holding more dollar debt do not invest less than their counterparts in the aftermath of a depreciation. We show that this result is due to …rms matching the currency denomination of their liabilities with the exchange rate sensitivity of their pro…ts. Because of this matching, the negative balance sheet e¤ects of a depreciation on …rms holding dollar debt are o¤set by the larger competitiveness gains of these …rms.
The paper presents a new database on sovereign debt in the Americas, describing the sources used ... more The paper presents a new database on sovereign debt in the Americas, describing the sources used and briefly discussing several methodological issues. The paper also highlights major trends in level and composition of public debt in the Americas, discussing debt dollarization in detail.
Understanding the extent to which interventions in financial markets can reduce liquidity constra... more Understanding the extent to which interventions in financial markets can reduce liquidity constraints is of crucial importance to researchers and policymakers. Even though there is consensus that limited access to financing can reduce the number,of profitable projects undertaken by entrepreneurs,there is little conclusive research on how well governmental,interventions address this problem. We explore this question by examining,the Partial Credit
Using a new database on the currency composition of assets and liabilities, this paper explores t... more Using a new database on the currency composition of assets and liabilities, this paper explores the determinants and consequences of currency mismatches in Chilean non-financial firms. As in previous firm level studies for Chile, we find that in periods following a depreciation firms with higher dollar debt do not underperform their peso counterparts. However, once we adequately control for differences in the currency composition of assets, income and net derivative positions, we do find a significant balance sheet effect. In addition, we find that derivatives play a role in insulating firm level investment from exchange rate shocks. In line with previous studies, we also find evidence of currency matching in Chilean corporates. Firms in Chile actively reduce the risks associated with exchange rate exposure by matching the currency composition of their debt with that of their income and assets, and by taking on derivatives if no "real" hedge is available. Finally, we find significant changes in the level of net currency exposure after the exchange rate was floated in 1999. We argue that one possible interpretation of these results is due to the effect of higher exchange rate variance on the relative risk of domestic and foreign debt.
El presente estudio analiza en el contexto del escenario de alta volatilidad del tipo de cambio, ... more El presente estudio analiza en el contexto del escenario de alta volatilidad del tipo de cambio, los determinantes y niveles de los descalces cambiarios para una muestra de empresas manufactureras de distintos tamaños en el año 2004. Entre las principales conclusiones se obtiene que: (i) la exposición real se concentra en aquellas firmas con menores restricciones financieras (las de mayor tamaño); (ii) dichas firmas usan la composición por monedas de sus pasivos para reducir su descalce agregado; y (iii) el uso de derivados es escaso entre las firmas del sector manufacturero, siendo nulo para las firmas pequeña y mediana.
Much has been written recently about the problems for emerging markets that might result from a m... more Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income flows) denominated in local currency. In particular, several models, developed in the aftermath of financial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth effect, offset the expansionary competitiveness effect. Assessing which effect dominates, however, is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-financial firms in five Latin American countries. We estimate, at the firm level, the reduced-form effect on investment of holding foreign-currency-denominated debt during an exchange-rate realignment. We consistently find that this effect is positive, contrary to the predicted sign of the net-worth effect. Additionally, we show that the estimated coefficient can be decomposed into competitiveness and net-worth effects, and we provide direct evidence that the competitiveness effect dominates the net-worth effect. We discuss some out-of-sample implications of these results.
Microeconomic flexibility is at the core of economic growth in modern market economies because it... more Microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative-destruction, The main reason why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists object to the hypothesis that labor market
We estimate a reduced form model for the daily dynamics of the nominal spot exchange rate in Chil... more We estimate a reduced form model for the daily dynamics of the nominal spot exchange rate in Chile. The model does reasonably well in explaining the long and short run dynamics for the peso-dollar exchange rate for the period 2001-2006. In addition, we extend the model to evaluate the effects of the foreign investment of pension funds, foreign exchange rate
Page 1. Bond Markets in Latin aMerica On the Verge of a Big Bang? edited by Eduardo Borensztein, ... more Page 1. Bond Markets in Latin aMerica On the Verge of a Big Bang? edited by Eduardo Borensztein, Kevin Cowan, Barry Eichengreen, and Ugo Panizza Page 2. Bond Markets in Latin America Page 3. Page 4. Bond Markets in Latin America: On the Verge of a Big Bang? ...
This paper tests a specific channel through which institutions affect output per capita: the role... more This paper tests a specific channel through which institutions affect output per capita: the role of institutions in firm-level division of production. We argue that weaker institutions increase transaction costs, including those incurred by a firm when dealing with suppliers of intermediate goods. Firms respond to these higher costs by substituting intermediate goods produced within the firm for those externally
Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging ... more Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging markets. Although this risk is microeconomic in nature, the evidence advanced thus far has taken the form of macro correlations. We evaluate this mechanism empirically at the micro level by using a database of over 3000 publicly traded firms from fifteen emerging markets. We
Why do firms and banks hold foreign currency denominated liabilities? Cowan and Do argue that for... more Why do firms and banks hold foreign currency denominated liabilities? Cowan and Do argue that foreign currency debt, by altering the effect of a devaluation on output, has a disciplining effect when the Central Bank�s objectives differ from the social optimum. However, under imperfect information, bad priors about the Central Bank induce excess dollarization of liabilities, which in turn limits
Latin American economies are exposed to substantial external vulnerability. Domestic imbalances a... more Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that
Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of... more Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of economic growth in modern market economies. The main reason for why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, other institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its
Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging ... more Substantial attention has been paid in recent years to the risk of maturity mismatch in emerging markets. Although this risk is microeconomic in nature, the evidence advanced thus far has taken the form of macro correlations. We evaluate this mechanism empirically at the micro level by using a database of over 3000 publicly traded firms from fifteen emerging markets. We measure the risk of short-term exposure by estimating, at the firm level, the effect on investment of the interaction of short-term exposure and aggregate capital flows. This effect is (statistically) zero, contrary to the prediction of the maturity-mismatch hypothesis. This conclusion is robust to using a variety of different estimators, alternative measures of capital flows, and controls for devaluation effects and access to international capital. We do find evidence that short-termexposed firms pay higher financing costs and liquidate assets at "fire sale" prices, but not that this reduction in net worth translates into a drop in investment.
Much has been written recently about the problems for emerging markets that might result from a m... more Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income ‡ows) denominated in local currency. In particular, several models, developed in the aftermath of …nancial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth e¤ect, o¤set the expansionary competitiveness e¤ect. Assessing which e¤ect dominates is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-…nancial …rms in …ve Latin American countries. We estimate, at the …rm level, the reduced-form e¤ect on investment of holding foreign-currencydenominated debt during an exchange-rate realignment. We consistently …nd that, contrary to the predicted sign of the net-worth e¤ect, …rms holding more dollar debt do not invest less than their counterparts in the aftermath of a depreciation. We show that this result is due to …rms matching the currency denomination of their liabilities with the exchange rate sensitivity of their pro…ts. Because of this matching, the negative balance sheet e¤ects of a depreciation on …rms holding dollar debt are o¤set by the larger competitiveness gains of these …rms.
The paper presents a new database on sovereign debt in the Americas, describing the sources used ... more The paper presents a new database on sovereign debt in the Americas, describing the sources used and briefly discussing several methodological issues. The paper also highlights major trends in level and composition of public debt in the Americas, discussing debt dollarization in detail.
Understanding the extent to which interventions in financial markets can reduce liquidity constra... more Understanding the extent to which interventions in financial markets can reduce liquidity constraints is of crucial importance to researchers and policymakers. Even though there is consensus that limited access to financing can reduce the number,of profitable projects undertaken by entrepreneurs,there is little conclusive research on how well governmental,interventions address this problem. We explore this question by examining,the Partial Credit
Using a new database on the currency composition of assets and liabilities, this paper explores t... more Using a new database on the currency composition of assets and liabilities, this paper explores the determinants and consequences of currency mismatches in Chilean non-financial firms. As in previous firm level studies for Chile, we find that in periods following a depreciation firms with higher dollar debt do not underperform their peso counterparts. However, once we adequately control for differences in the currency composition of assets, income and net derivative positions, we do find a significant balance sheet effect. In addition, we find that derivatives play a role in insulating firm level investment from exchange rate shocks. In line with previous studies, we also find evidence of currency matching in Chilean corporates. Firms in Chile actively reduce the risks associated with exchange rate exposure by matching the currency composition of their debt with that of their income and assets, and by taking on derivatives if no "real" hedge is available. Finally, we find significant changes in the level of net currency exposure after the exchange rate was floated in 1999. We argue that one possible interpretation of these results is due to the effect of higher exchange rate variance on the relative risk of domestic and foreign debt.
El presente estudio analiza en el contexto del escenario de alta volatilidad del tipo de cambio, ... more El presente estudio analiza en el contexto del escenario de alta volatilidad del tipo de cambio, los determinantes y niveles de los descalces cambiarios para una muestra de empresas manufactureras de distintos tamaños en el año 2004. Entre las principales conclusiones se obtiene que: (i) la exposición real se concentra en aquellas firmas con menores restricciones financieras (las de mayor tamaño); (ii) dichas firmas usan la composición por monedas de sus pasivos para reducir su descalce agregado; y (iii) el uso de derivados es escaso entre las firmas del sector manufacturero, siendo nulo para las firmas pequeña y mediana.
Much has been written recently about the problems for emerging markets that might result from a m... more Much has been written recently about the problems for emerging markets that might result from a mismatch between foreign-currency denominated liabilities and assets (or income flows) denominated in local currency. In particular, several models, developed in the aftermath of financial crises of the late 1990s, suggest that the expansion in the "peso" value of "dollar" liabilities resulting from a devaluation could, via a net-worth effect, offset the expansionary competitiveness effect. Assessing which effect dominates, however, is ultimately an empirical matter. In this vein, we construct a new database with accounting information (including the currency composition of liabilities) for over 450 non-financial firms in five Latin American countries. We estimate, at the firm level, the reduced-form effect on investment of holding foreign-currency-denominated debt during an exchange-rate realignment. We consistently find that this effect is positive, contrary to the predicted sign of the net-worth effect. Additionally, we show that the estimated coefficient can be decomposed into competitiveness and net-worth effects, and we provide direct evidence that the competitiveness effect dominates the net-worth effect. We discuss some out-of-sample implications of these results.
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