Economics Theses and Dissertations
Permanent URI for this collectionhttp://hdl.handle.net/1903/2763
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Item Foreign Currency Debt and Capital Flows in Emerging Markets(2018) Hardy, Bryan; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the determinants and consequences of capital inflows and foreign currency (FX) debt in emerging markets. Chapter 1 summarizes the topics, questions addressed, and findings. Chapter 2 studies the effects of balance sheet shocks driven by FX debt using a unique dataset of firm FX exposures matched with firm-bank lending data from listed firms in Mexico. I find that smaller non-exporters with FX mismatch see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with less FX mismatch. Larger non-exporters with FX mismatch also have lower loan growth in FX following the shock, but are able to increase borrowing in Peso, resulting in higher growth in employment and physical capital relative to firms with less FX mismatch. My results imply that net worth based borrowing constraints are tighter for smaller firms and for loans in FX. I present a stylized model that rationalizes these findings. Chapter 3 examines how international capital flows into a country, that is by which sector capital flows in and out, and what drives those flows. To do so, we construct a new dataset of capital inflows and outflows split by sector. We establish four new stylized facts highlighting the differences in responses by sector to local and global shocks. These new facts are inconsistent with the standard models in which all foreign and domestic agents invest or disinvest in the same countries as a response to domestic and global shocks. Chapter 4 examines the link between the global financial cycle (proxied by the VIX) and the currency composition of lending by emerging market banks. I construct a country-panel dataset of lending shares in FX, and show that this moves positively with the VIX. Countries that are more open to capital inflows or have poorly capitalized banking systems, however, tend to lend more in FX when VIX is low. Using matched firm-bank data from Mexico, I find that the positive association of FX lending with global liquidity holds in the microdata, and that this relationship is driven by well-capitalized banks.Item Borrowing Constraints and the Business Cycle in Emerging Markets(2012) Komatsuzaki, Takuji; Korinek, Anton; Vegh, Carlos A; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The global financial crisis of 2008/09 has reminded both policymakers and academics of the powerful effect of sudden changes in the direction of capital flows. A tightening of borrowing constraints was an important contributor to these sudden changes and forced many borrowers into rapid deleveraging. Based on their experience in the 1990s, a number of emerging market economies had prepared for such shocks by accumulating foreign reserves. This dissertation analyzes the effects of such credit shocks and the optimal precautionary response in emerging economies. Chapter 1 is a brief introduction that motivates the topic and overviews main results of the subsequent chapters. Chapter 2 takes the view of a small open economy. It develops a formal model of why emerging markets simultaneously hold external debt and external reserves. Reserves may be held simultaneously with debt even when their return is lower because they are valuable for self-insurance. Two key assumptions generate this finding. First, the economy may experience a sudden stop in its access to new foreign debt issuance. Second, debt has longer maturity than reserves. When a sudden stop occurs, the maturity difference allows the agent to repay the debt gradually, giving a liquidity advantage to reserves. I numerically show that the model economy optimally chooses simultaneous holding for most periods. The model also generates contrasting responses of reserves to the sudden stop shock and the endowment shock, consistent with the data. Chapter 3 takes the view of a firm in an emerging economy. It investigates the relationship between credit shocks and firm financing patterns. After empirically establishing that banking crises are followed by stagnation in credit and that investment is financed less by debt and more by internal fund or equity at the time of banking crises, I develop a dynamic model of the firm consistent with this finding. In the model, the firm increases its reliance on retained earnings or equity issuance in response to a negative credit shock. In the long-run distribution, the introduction of a credit shock leads to a lower average debt and higher volatility in equity payout, debt, and capital. An extended period of negative credit shocks leads to a creditless recovery where investment is financed not by debt but by retained earnings or equity issuance.