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CURRENCY CRISIS AND BALANCE SHEET CHANNEL EFFECT. The Korean Experience

Author

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  • Francois HERMET

    (CERESUR, University of La Reunion)

Abstract

Some theoretical crisis models of third generation incorporate the "balance sheet effect" emphasized by Bernanke and Gertler (1989) and many papers since. In a crisis context this mechanism, based on asymmetric information in the credit market, describes how a currency depreciation affects domestic firms' investment. This paper proposes an empirical validation of this theoretical prediction. To this end, we study the investment behaviour of 477 Korean manufacturing firms, particularly during the 1997 Asian crisis. However, contrary to many studies in which cash flow account variable is used as proxy for entrepreneurs'' net worth, our analysis focuses on a more relevant variable, the cash stock, to measure these internal funds. The preliminary results stipulate that firms'' balance sheets in the aftermath of the Asian crisis, are more robust in explaining investment than before the crisis. It is further shown that this relationship is more relevant for small firms.

Suggested Citation

  • Francois HERMET, 2003. "CURRENCY CRISIS AND BALANCE SHEET CHANNEL EFFECT. The Korean Experience," Economics Bulletin, AccessEcon, vol. 6(12), pages 1-12.
    • Handle: RePEc:ebl:ecbull:eb-03f30005
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    Cited by:

    1. Zabavnik, Darja & Verbič, Miroslav, 2023. "The effects of financial frictions on Slovenian companies: A panel VAR approach," Finance Research Letters, Elsevier, vol. 58(PC).
    2. Agustinus Prasetyantoko, 2006. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," Post-Print halshs-00134223, HAL.
    3. Nehrebecki Marian, 2020. "Cash flow sensitivity of investment: Evidence from the Polish listed companies," Central European Economic Journal, Sciendo, vol. 7(54), pages 157-171, January.
    4. Martial Dupaigne & Marc Y. Robert, 2006. "On the role of capital flows – or the lack thereof – in sudden stops," Revue d'économie politique, Dalloz, vol. 116(1), pages 79-90.
    5. Agustinus, Prasetyantoko, 2007. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," MPRA Paper 6501, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • D2 - Microeconomics - - Production and Organizations

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