Entering the export market entails incurring costs such as market research costs, market development and distribution channel development costs. A forward looking manager would weigh these sunk costs incurred during market entry, against the future stream of income. Therefore, entering the export market becomes a question of which firms have the ability to undertake this investment.
As per the Melitz model (2003), firms self select into the export industry if their productivity is high as it enables them to undertake the investment associated with new market entry. The Melitz model assumes only one factor of production; labor, whose supply is inelastic at the aggregate level. In this paper, I consider the other factor of production; capital, the availability of which might constrain a firm’s entry into the export market. In the presence of financial frictions, a firm’s investment decision will not be independent of its financing decision. Therefore, even a highly productive firm might be inhibited from entering the export market if it is constrained by its finances.
The well-documented success of microenterprise credit programs in recent years has led to an explosion of interest in their use as a tool for alleviating poverty and generating economic growth in both developing and transitional economies. Evidence of this unbridled enthusiasm for such progra s occurred at a summit on microenterprise lending sponsored by the Clinton Administration in January 1997. At this summit a consortium of international aid agencies, commercial banks, and governmental authorities agreed on a plan to direct $23.6 billion toward providing access to credit to 100 million impoverished households by the year 2005. While numerous statistics have been compiled regarding the impressive participation and repayment rates realised of many microenterprise lending programs, there is a critical need for research that examines the changes in economic behaviour of loan recipients after they obtain access to this credit.
In this paper a money demand function for the dollarized Paraguayan economy is derived. The focus lies on finding the determinants of currency holdings decisions (Guarani vs. USD). Natural candidate variables for these decisions are the nominal exchange rate and foreign/domestic interest rate spreads. The model established is similar to models used for open economies such as Sriram (1999). The monetary aggregate under surveillance is M2, which in Paraguay represents national currency holdings including all non remunerated money holdings and deposits of all maturities. In line with the use of M2, interest rate spreads between long and short term deposits usually found in money demand models become obsolete. In the analysis a cleaning procedure for M2 is introduced.
