Related ideas have been expressed by Yellen (1998), Rajan and Zingales (1998),
and Caballero and Krishnamurthy (1998). Yellen argues that `a &relationships'
model of capital allocation is extraordinarily susceptible to a deterioration in
perceptions about the quality of investment decisions.a Rajan and Zingales
explain the problems that can occur when a relationship-based "nancial system is
opened up to capital in#ows. Caballero and Krishnamurthy emphasize the
underinvestment in appropriate collateral that occurs due to incentive problems.
Section 2 presents the assumptions and implications of our model. Section 3
explains our sources and data on exchange rate depreciation and stock market