Investment, Devaluation, and Foreign Currency Exposure: The Case of Mexico

This paper studies ̄rm-level investment in the wake of the Mexican peso crisis of 1994. While exporters outperform nonexporters in terms of pro ̄ts and sales after the devaluation, their investment is constrained by weak balance sheets. Speci ̄cally, we ̄nd that ̄rms with heavy exposure to short-term foreign currency debt before the devaluation experienced relatively low levels of post-devaluation investment. The data also imply that increased sales uncertainty after the peg's collapse deterred investment, particularly in the tradeable sector. The results con ̄rm the recent theoretical literature's focus on weak balance sheets as driving the recessionary impact of devaluations in emerging markets. ¤E-mail: [email protected]. University of Chicago, Graduate School of Business, 1101 E. 58th St., Chicago, IL 60637. I would like to thank Gita Gopinath, Erik Hurst, and seminar participants at Wisconsin, Purdue and Chicago for comments and Daniel Volberg for research assistance. This is a revised version of a paper with the same title circulated in 2001.