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Financial crises and the evolution of credit reallocation: Evidence from Korea

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  • Hyun, Junghwan

Abstract

This paper examines the evolution of credit reallocation from a geographical location perspective using data from Korean non-financial firms 1984 to 2013. Employing a Bayesian dynamic latent factor model, I decompose local credit reallocation rates into national, region-specific, and idiosyncratic allocation components. This paper uncovers evidence that the national factor, which explains the movement of credit reallocation across 14 administrative districts, intensified after the 1997 financial crisis and played a major role in driving local credit reallocation rates. Furthermore, district-specific factors, which exhibit heterogeneous patterns across districts, also account for a significant portion of credit reallocation fluctuations, which is attributable to districts' heterogeneous geographical properties and dominant industries. Importantly, district-specific factors are the main driver for reallocation dynamics for small firms, suggesting that small firms' financing is more affected by local financial market conditions, whereas the national factor explains more of large firms' debt financing.

Suggested Citation

  • Hyun, Junghwan, 2016. "Financial crises and the evolution of credit reallocation: Evidence from Korea," Economic Modelling, Elsevier, vol. 56(C), pages 25-34.
    • Handle: RePEc:eee:ecmode:v:56:y:2016:i:c:p:25-34
    DOI: 10.1016/j.econmod.2016.03.019
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    3. Amira MAJOUL & Olfa MANAI DABOUSSI, 2016. "Nonlinear Effects of the Financial Crisis on Economic Growth in Asian Countries: Empirical Evaluation with a PSTR Model," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 445-456, August.

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