Authors

• Luis Carranza(lcarranza@usmp.edu.pe)
• Juan M. Cayo ( )
  San Martin de Porres University
• José E. Galdón-Sánchez(jose.galdon@unavarra.es)
  Public University of Navarra

Abstract
This paper analyzes the impact of the exchange rate volatility on the performance of the Peruvian economy using financial information from 163 non-financial listed firms. We find evidence that, for firms holding dollar-denominated debt, investment decisions are negatively affected by real exchange rate depreciation. The reasons behind this result are: (i) the high degree of liability dollarization and currency mismatch that create the conditions for a balance sheet effect and a financial stress in the aftermath of a currency depreciation, (ii) the strong bank-lending channel that follows and reinforces the balance sheet effect, (iii) the domestic demand shrinkage that severely affects the firms sales, and (iv) the relatively small and poorly diversified export sector.

Classification JEL:E22; F41; G31

Number of Pages:27

Creation Date:2003-09-01

Number:null/03