  Borrowing constraints are a key component of modern international
macroeconomic models. The analysis of Emerging Markets (EM) economies generally
assumes collateral borrowing constraints, i.e., firms access to debt is
constrained by the value of their collateralized assets. Using credit registry
data from Argentina for the period 1998-2020 we show that less than 15% of
firms debt is based on the value of collateralized assets, with the remaining
85% based on firms cash flows. Exploiting central bank regulations over banks
capital requirements and credit policies we argue that the most prevalent
borrowing constraints is defined in terms of the ratio of their interest
payments to a measure of their present and past cash flows, akin to the
interest coverage borrowing constraint studied by the corporate finance
literature. Lastly, we argue that EMs exhibit a greater share of interest
sensitive borrowing constraints than the US and other Advanced Economies. From
a structural point of view, we show that in an otherwise standard small open
economy DSGE model, an interest coverage borrowing constraints leads to
significantly stronger amplification of foreign interest rate shocks compared
to the standard collateral constraint. This greater amplification provides a
solution to the Spillover Puzzle of US monetary policy rates by which EMs
experience greater negative effects than Advanced Economies after a US interest
rate hike. In terms of policy implications, this greater amplification leads to
managed exchange rate policy being more costly in the presence of an interest
coverage constraint, given their greater interest rate sensitivity, compared to
the standard collateral borrowing constraint.
