Investment, devaluation, and foreign currency exposure: The case of Mexico

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Abstract

This paper studies firm-level investment in the wake of the Mexican peso crisis of 1994. While exporters outperform nonexporters in terms of profits and sales after the devaluation, their investment is constrained by weak balance sheets. Specifically, we find that firms with heavy exposure to short-term foreign currency debt before the devaluation experienced relatively low levels of post-devaluation investment. The data also imply that increased sales uncertainty after the peg's collapse deterred investment, particularly in the tradable sector. The results confirm the recent theoretical literature's focus on weak balance sheets as driving the recessionary impact of devaluations in emerging markets.

Original languageEnglish (US)
Pages (from-to)95-113
Number of pages19
JournalJournal of Development Economics
Volume78
Issue number1
DOIs
StatePublished - Oct 1 2005
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Development
  • Economics and Econometrics

Keywords

  • Balance sheets
  • Emerging market crises
  • Financial constraints
  • Investment

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