Macro Shocks and Industrial Portfolio Responses: Econometric Model for LDCs
JAMES TYBOUT and TAEHO BARK
Macroeconomic conditions change frequently and dramatically in the semiindustrialized countries. In this turbulent environment, policymakers hope that the industrial sector not only remains financially sound, but manages to grow rapidly. This study identifies the macro conditions under which industrial growth and financial stability are most likely, and those conditions that are most prone to create disaster. 1
We model interest rates, exchange rates, and aggregate demand conditions as affecting industrial growth and financial risk through two channels. First, because these variables affect firms' income, they affect firms' net worth expansion. Second, because the link between macro variables and income depends on the proportions in which firms hold fixed capital, inventories, financial assets, and debts (hereafter the "portfolio mix"), changes in macro variables also induce portfolio adjustments. This chapter develops an empirical model that allows us to calibrate the strength and timing of each effect.
The model has several antecedents in the literature ( Taggart 1977; Yardeni 1978; Jalilvand and Harris 1984). However, it breaks new ground by (1) treating corporate net income and savings as endogenous functions of macroeconomic and firm-specific variables; (2) treating fixed capital accumulation as endogenous; (3) distinguishing between domestic and foreign-currency-denominated balance sheet items; and (4) relaxing assumptions regarding functional forms and error structures. The model is also unique in that it is estimated with micro data from a developing country.
When fit to Uruguayan data, the model yields several basic findings. First, corporate income is very sensitive to output demand and the cost of dollar credit. Second, fluctuations in corporate income have a clear direct effect on the rate of