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Identifying the Demand and Supply Effects of Financial Crises on Bank Credit—Evidence from Taiwan

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  • Nan-Kuang Chen

    ()
    (Department of Economics, National Taiwan University, 21 Hsu Chow Road, Taipei 10020, Taiwan)

  • Hung-Jen Wang

    ()
    (Department of Economics, National Taiwan University, 21 Hsu Chow Road, Taipei 10020, Taiwan, and The Institute of Economics, Academia Sinica, 128 Academia Road, Taipei 11529, Taiwan)

Abstract

In the aftermath of the Asian financial crisis, Taiwan's bank credits slowed down dramatically while the economy experienced one of the worst recessions in recent history. Whether the slowdown was mainly caused by the demand or the supply effect is unclear. An innovative empirical approach is adopted that uses the short-side rule of bank loans' market transactions to help infer the relative shifts of the demand and supply. For the disaggregate data, a novel model is proposed that accommodates the short-side rule and yet requires only data from the borrowers or the lenders. We find that a large decline in supply is mainly responsible for the slowdown, and we identify the deposit drain and the increase in overdue loans as the main contributing factors. Results also indicate that smaller firms are disproportionately affected by the credit cutback, and that shrinkages in alternative financing sources might have indirectly contributed to the excess demand.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2008)
Issue (Month): 1 (July)
Pages: 26-49

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Handle: RePEc:sej:ancoec:v:75:1:y:2008:p:26-49

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Cited by:
  1. Fungáčová, Zuzana & Herrala, Risto & Weill, Laurent, 2013. "The influence of bank ownership on credit supply: Evidence from the recent financial crisis," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 136-147.
  2. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 43(C), pages 107-129.
  3. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2013. "The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank," Working Paper Series, European Central Bank 1562, European Central Bank.
  4. Eric Wong & Andrew Tsang & Steven Kong, 2014. "How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong," Working Papers, Hong Kong Institute for Monetary Research 032014, Hong Kong Institute for Monetary Research.
  5. International Monetary Fund, 2010. "Post-Crisis Bank Behavior," IMF Working Papers 10/1, International Monetary Fund.
  6. Herrala, Risto & Jia, Yandong, 2012. "Has the Chinese growth model changed? A view from the credit market," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 5/2012, Bank of Finland, Institute for Economies in Transition.
  7. Wang, Hung-Jen & Ho, Chia-Wen, 2009. "Estimating fixed-effect panel stochastic frontier models by model transformation," MPRA Paper 31081, University Library of Munich, Germany.

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