Deposit insurance, regulatory forbearance and economic growth: implications for the Japanese banking crisis

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Deposit insurance, regulatory forbearance and economic growth: implications for the Japanese banking crisis

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Robert Dekle
Kenneth Kletzer

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Abstract

An endogenous growth model with financial intermediation is used to show how public deposit insurance and weak prudential regulation can lead to banking crises and permanent declines in economic growth. The impact of regulatory forbearance on investment, saving and asset price dynamics under perfect foresight are derived in the model. The assumptions of the theoretical model are based on essential features of the Japanese financial system and its regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s. An implication of our analysis is that delaying the resolution of banking crises adversely affects future economic growth.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 2004-26.

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Date of creation: 2004
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Handle: RePEc:fip:fedfpb:2004-26

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Paper
- Dekle, Robert & Kletzer, Kenneth, 2004. "Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Robert Dekle & Kenneth Kletzer, 2005. "Deposit Insurance Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," IMF Working Papers 05/169, International Monetary Fund. [Downloadable!]
- Robert Dekle & Kenneth Kletzer, 2004. "Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," Santa Cruz Department of Economics, Working Paper Series 1019, Department of Economics, UC Santa Cruz. [Downloadable!]
- Robert Dekle & Kenneth Kletzer, 2004. "Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," Santa Cruz Center for International Economics, Working Paper Series 1017, Center for International Economics, UC Santa Cruz. [Downloadable!]

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-05-23 (All new papers)
NEP-FIN-2005-05-23 (Finance)
NEP-HIS-2005-05-23 (Business, Economic & Financial History)
NEP-IAS-2005-05-23 (Insurance Economics)
NEP-REG-2005-05-23 (Regulation)
NEP-SEA-2005-05-23 (South East Asia)

References listed on IDEAS
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Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 305-335, September. [Downloadable!] (restricted)
Other versions:
- Robert Dekle & Kenneth Kletzer, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," Santa Cruz Center for International Economics, Working Paper Series 1002, Center for International Economics, UC Santa Cruz. [Downloadable!]
- Robert Dekle & Kenneth Kletzer, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," CIRJE F-Series CIRJE-F-225, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
Robert Dekle & Kenneth Kletzer, 2002. "Financial intermediation, agency, and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis," Pacific Basin Working Paper Series 02-10, Federal Reserve Bank of San Francisco. [Downloadable!]
Other versions:
- Robert Dekle & Kenneth Kletzer, 2002. "Financial intermediation, agency and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
Other versions:
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Other versions:
- Robert Dekle & Kenneth Kletzer, . "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," IMF Working Papers 01/63, International Monetary Fund. [Downloadable!]
- Robert Dekle & Kenneth Kletzer, 2002. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 507-558 National Bureau of Economic Research, Inc. [Downloadable!]
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Other versions:
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Other versions:
- Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
Other versions:
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Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," Papers 505, Osaka - Institute of Social and Economic Research.
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Other versions:
- Tamim Bayoumi, 1999. "The Morning After--Explaining the Slowdown in Japanese Growth in the 1990s'," IMF Working Papers 99/13, International Monetary Fund.
- Tamim Bayoumi, 1999. "The Morning After: Explaining the Slowdown in Japanese Growth in the 1990s," NBER Working Papers 7350, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Fumio Hayashi & Edward C. Prescott, 2002. "The 1990s in Japan: A Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January. [Downloadable!] (restricted)
Other versions:
- Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
- Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics. [Downloadable!]

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