The Open Economy Balance Sheet Channel and the Exporting Decisions of Firms: Evidence from the Brazilian Crisis of 1999

Abstract

Many studies consider the aggregate impact of crises on output and the fiscal cost of reconstruction, but few studies of the impact of a crisis at the level of the firm. In this paper we consider the impact of the Brazilian crisis of 1999 on the extensive and intensive margin of exporters versus non-exporters. Using a unified theoretical framework based on a two-sector extension of the combined fixed and variable investment versions of the Holmström and Tirole (1997) closed-economy model, we explore predictors that firms will engage in global markets and export more intensively. Our results based on a detailed firm-level panel of data for Brazilian 52,667 firms from 1995-2007, show that the decision to export and increase export sales is driven by size, the debt ratio, the current ratio and operating costs as well as the direct impact of the crisis itself. The findings suggest that the mechanism is driven by the response of the credit market to the creditworthiness of the firm as it is by changing terms of trade.

Keywords: credit channel, open economy, exports, currency crisis

JEL Classification: D21, D22, F14, F23