A firm-level chronicle of financial crises in the Southern Cone

This paper chronicles the recent emergence of financial crises in the 'Southern Cone' countries of South America. Relying on firm-level panel data, major changes in the macro and regulatory environments are linked to changes in firms' earnings streams and financial structures. For each country, a 'boom' phase, a 'squeeze' phase, and a 'bust' phase are identified. It is argued that the proximate cause of this pattern was wild fluctuation in the expected real return on financial assets. Though no formal model is developed, it is suggested that these swings were due to the system of incentives created by rapid banking sector deregulation cum exchange-rate-based stabilization policies.