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Bank Lending and Economic Activity in Japan: Did 'Financial Factors' Contribute to the Recent Downturn?

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  • Brunner, Allan D
  • Kamin, Steven B

Abstract

In this paper, we examine the role of "financial factors" in Japan and attempt to gauge their recent impact on the Japanese economy. First, we find that proxies for financial factors enter significantly in behavioural equations for loan standards, loan demand, and aggregate demand. Second, we find strong evidence that financial factors contributed to Japan's recent recession. On the loan supply side, exogenous declines in equity prices appear to have led to a sharp increase in bank loan standards and a substantial subsequent decline in loans and economic activity. We also find some evidence that an exogenous contraction in loan supply may have lowered output by a small degree, but only in the early phases of the recession. On the loan demand side, asset price declines also led firms and households to sharply reduce their demand for bank loans and goods, although it is unclear how much this influence may reflect traditional wealth effects. In addition, loan demand shocks, which could reflect balance-sheet problems not captured by our model, account for much of the remainder of the shortfall in loans. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 3 (1998)
Issue (Month): 1 (January)
Pages: 73-89

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Handle: RePEc:ijf:ijfiec:v:3:y:1998:i:1:p:73-89

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References

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  1. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  2. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
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  8. John Ammer, 1994. "Inflation, inflation risk, and stock returns," International Finance Discussion Papers 464, Board of Governors of the Federal Reserve System (U.S.).
  9. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
  10. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
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  12. Sun Bae Kim & Ramon Moreno, 1994. "Stock prices and bank lending behavior in Japan," Economic Review, Federal Reserve Bank of San Francisco, pages 31-42.
  13. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  14. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
  15. Frederic S. Mishkin, 1977. "What Depressed the Consumer? The Household Balance Sheet and the 1973-75 Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 123-174.
  16. Ben Bernanke, 1990. "On the Predictive Power of Interest Rates and Interest Rate Spreads," NBER Working Papers 3486, National Bureau of Economic Research, Inc.
  17. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  18. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  19. Joe Peek & Eric S. Rosengren, 1992. "The capital crunch in New England," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 21-31.
  20. Allan D. Brunner & Steven B. Kamin, 1994. "Determinants of the 1991-93 Japanese recession: evidence from a structural model of the Japanese economy," International Finance Discussion Papers 479, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Michael Frömmel & Torsten Schmidt, 2006. "Bank Lending and Asset Prices in the Euro Area," RWI Discussion Papers 0042, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  2. Takatoshi Ito & Yuri Nagatake Sasaki, 1998. "Impacts of the Basle Capital Standard on Japanese Banks' Behavior," NBER Working Papers 6730, National Bureau of Economic Research, Inc.
  3. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 277-344 National Bureau of Economic Research, Inc.
  4. Ramkishen S. Rajan & Reza Siregar & Iman Sugema, 2003. "Why was there a precrisis capital inflow boom in Southeast Asia?," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(3), pages 265-283.
  5. Alan Ahearne & Joseph Gagnon & Jane Haltmaier & Steve Kamin ... [et al.]., 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers 729, Board of Governors of the Federal Reserve System (U.S.).

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