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Discussion Paper Details

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Title: What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?

Author(s): Sebnem Kalemli-Ozcan, Herman Kamil and Carolina Villegas-Sanchez

Publication Date: August 2011

Keyword(s): bank lending, exports, foreign ownership, growth, short-term dollar debt and twin crisis

Programme Area(s): International Macroeconomics

Abstract: We provide evidence on the real effects of credit supply shocks utilizing a new firm-level database from six Latin American countries between 1990 to 2005. Holding creditworthiness constant through foreign currency debt exposure, we compare investment undertaken by domestic exporters to that of foreign-owned exporters, where the latter's exposure to the liquidity shock is lower. We find that foreign-owned exporters increase investment by 15 percentage points relative to domestic exporters only when the currency crisis occurs simultaneously with a banking crisis. These findings suggest that the key factor hindering investment during financial crises is the decline in credit supply.

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Bibliographic Reference

Kalemli-Ozcan, S, Kamil, H and Villegas-Sanchez, C. 2011. 'What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8543