Seminario CEDE - Leonardo Elias

What are the real costs of reversals in international capital flows? In this paper, I exploit plausibly exogenous variation in firms' exposure to rollover risk to identify a causal liquidity channel at play during sudden stop episodes. Using a panel of firms across 39 countries, I show that firms with higher exposure (as measured by the share of long-term debt maturing over the next year) reduce investment ten percentage points more than non-exposed firms following sudden stops in capital flows. The impact is persistent: exposed firms experience lower investment, lower employment and lower assets than non-exposed firms even three years after the initial shock. In robustness tests, I show that the results are specific to sudden stop episodes in that they do not hold in periods without sudden stops, and they hold across sudden stop episodes regardless of whether the sudden stop takes place during large economic contractions.

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