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Fiscal sustainability and contingent liabilities from recent credit expansions in South Korea and Thailand

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  • Diego Valderrama

Abstract

While South Korea and Thailand had relatively sustainable fiscal policies prior to the Asian crisis, the long-term cost of the bailout of their financial sectors amounted to an estimated 30 to 40 percent of output, which was largely financed by public borrowing. The recent credit expansions in South Korea and Thailand have created new contingent liabilities for the governments of the two countries. This paper evaluates the impact of these rapid credit expansions on the sustainability of fiscal policy in South Korea and Thailand. In Thailand, a rapid credit expansion preceded the currency collapse that heralded the Asian crisis. Fiscal policy in South Korea appears to be consistent with its long-run budget constraint, while fiscal policy in Thailand is not consistent with its long-run budget constraint. A loss in international confidence may considerably tighten their borrowing limit very rapidly, regardless of the long-run sustainability of fiscal policy.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2005)
Issue (Month): ()
Pages: 29-41

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Handle: RePEc:fip:fedfer:y:2005:p:29-41

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Keywords: Financial crises - Asia ; Credit;

References

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  1. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  2. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  4. Enrique G. Mendoza & P. Marcelo Oviedo, 2004. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America: The Cases of Brazil, Colombia, Costa Rica, and Mexico," NBER Working Papers 10637, National Bureau of Economic Research, Inc.
  5. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad, 2003. "Equity Market Liberalization in Emerging Markets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 26(3), pages 275-299.
  6. Dong He, 2004. "The Role of KAMCO in Resolving Nonperforming Loans in the Republic of Korea," IMF Working Papers 04/172, International Monetary Fund.
  7. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
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