Working Paper: NBER ID: w13315
Authors: Simon Gilchrist; Jae W. Sim
Abstract: This paper uses firm-level panel data to analyze the role of financial factors in determining investment outcomes during the Korean financial crisis. Our identification strategy exploits the presence of foreign-denominated debt to measure shocks to the financial position of firms following the devaluation that occurred during the crisis period. Structural parameter estimates imply that financial factors may account for 50% to 80% of the overall drop in investment observed during this episode. Our estimates also imply that foreign-denominated debt had relatively little effect on aggregate investment spending. Counterfactual experiments suggest sizeable contractions in investment through this mechanism for economies that are more heavily dependent on foreign-denominated debt however.
Keywords: Investment; Korean Financial Crisis; Foreign-Denominated Debt; Structural Econometric Analysis
JEL Codes: E22; E44; F34; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign-denominated debt (F34) | investment (G31) |
| high-interest rates and low profits (G21) | balance sheet deterioration (G32) |
| balance sheet deterioration (G32) | investment (G31) |
| foreign-denominated debt (F34) | balance sheet deterioration (G32) |
| foreign-denominated debt (F34) | cost of external finance (G32) |
| cost of external finance (G32) | investment (G31) |
| foreign-denominated debt and firm characteristics (G32) | investment (G31) |