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Financial fragility in emerging market countries: Firm balance sheets and the productive structure

Yannick Kalantzis 1

(2005-05)

We build an overlapping generation model to study financial fragility in a two-sector small open economy. Firms are subject to a borrowing constraint and there is a currency mismatch in the balance sheets of the non-tradable sector. As a consequence, at a given point in time, multiple equilibria may arise, which makes self-fulfilling balance of payments crises possible. This state of financial fragility requires that firms producing non-tradable goods are sufficiently leveraged and that the relative size of the non-tradable sector is sufficiently large with regards to the tradable sector. We study under what conditions the endogenous evolution of these two structural factors, firm balance sheets and the productive structure, along an equilibrium path, eventually leads to a financially fragile state.

1:	Paris-Jourdan Sciences Economiques (PSE)
	CNRS : UMR8545 – École des Hautes Études en Sciences Sociales [EHESS] – Ecole des Ponts ParisTech – Ecole normale supérieure de Paris - ENS Paris

Subject

:

Humanities and Social Sciences/Economy and finances

Keyword(s): balance of payments crises – financial fragility – foreign currency debt – borrowing constraint – multiple equilibria

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From: Caroline Bauer <>

Submitted on: Thursday, 5 May 2011 10:31:13

Updated on: Friday, 6 May 2011 13:34:18