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Financial Constraints: a Propagation Mechanism of Foreign Shocks

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  • Rosario Aldunate

Abstract

This essay seeks to contribute to the credit-channel literature by studying how the effects of foreign shocks can be amplified in the economy due to the existence of financial constraints at the firm-level in a small open economy as Chile. For this purpose, this study analyzes the evolution of Chilean manufacturing firms between 1995 and 2005 thanks to a panel based on the Annual National Survey of Industries, measures of financial constraints built on the work by Rajan and Zingales (1998) and pays special attention to the Asian crisis, an episode that hit particularly hard the Chilean economy in terms of contraction of the credit flow. Regarding the exit probability, during the Asian crisis firms with liquidity needs were more likely to leave the market. On the intensive margin side, the number of workers, wage-bill, total income, and value-added were more negatively affected by this crisis in financially constrained firms.

Suggested Citation

  • Rosario Aldunate, 2021. "Financial Constraints: a Propagation Mechanism of Foreign Shocks," Working Papers Central Bank of Chile 897, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:897
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_897.pdf
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