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Borrowing constraints and asset market dynamics: evidence from the Pacific Basin

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  • Kenneth Kasa

Abstract

This paper estimates a linearized, stochastic version of Kiyotaki and Moore's (1997) credit cycle model, using land price data from Hong Kong, Japan, and Korea. It is shown that the welfare costs of borrowing constraints are positively related to the persistence of (de-trended) land price fluctuations. When the residual demand curve for land is inelastic and the steady state share of land held by the constrained sector is less than 30 percent, welfare costs are less than 1 percent of GDP in all countries. However, the costs of borrowing constraints rise quickly as the constrained sector becomes more important and as the elasticity of unconstrained land demand increases. For example, if the efficient share of the constrained sector is 50 percent and residual demand elasticity is 2.0, then costs range from 9 percent of GDP in Korea, where fluctuations are relatively transitory, to 11 percent of GDP in Japan, where land price fluctuations are the most persistent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 98-04.

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Date of creation: 1998
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Handle: RePEc:fip:fedfpb:98-04

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Keywords: Hong Kong ; Japan ; Korea ; Asia ; Financial crises - Asia;

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  1. Gertler, Mark, 1992. "Financial Capacity and Output Fluctuations in an Economy with Multi-period Financial Relationships," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(3), pages 455-72, July.
  2. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, Elsevier, vol. 1(2), pages 101-126, September.
  3. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
  4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  5. Kasa, Kenneth & Huh, Chan, 2001. "A Dynamic Model of Export Competition, Policy Coordination, and Simultaneous Currency Collapse," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 68-80, February.
  6. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  7. Jeffrey M. Lacker, 1998. "Collateralized debt as the optimal contract," Working Paper, Federal Reserve Bank of Richmond 98-04, Federal Reserve Bank of Richmond.
  8. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, Elsevier, vol. 8(3), pages 445-456, August.
  9. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 516-36, June.
  10. Edison, Hali J & Luangaram, Pongsak & Miller, Marcus, 1998. "Asset Bubbles, Domino Effects and 'Lifeboats': Elements of the East Asian Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1866, C.E.P.R. Discussion Papers.
  11. Jeffrey Lacker, 2001. "Online Appendix to Collateralized Debt as the Optimal Contract," Technical Appendices lacker01, Review of Economic Dynamics.
  12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  13. Nelson, Charles R & Kang, Heejoon, 1979. "Spurious Periodicity in Inappropriately Detrended Time Series," The Warwick Economics Research Paper Series (TWERPS) 161, University of Warwick, Department of Economics.
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Cited by:
  1. Chakraborty, Suparna, 2009. "The boom and the bust of the Japanese economy: A quantitative look at the period 1980-2000," Japan and the World Economy, Elsevier, Elsevier, vol. 21(1), pages 116-131, January.
  2. Kunieda, Takuma & Shibata, Akihisa, 2005. "Credit constraints and the current account: A test for the Japanese economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(8), pages 1261-1277, December.
  3. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71, pages 883-913, 07.
  4. Agliari Anna & Assenza Tiziana & Delli Gatti Domenico & Santoro Emiliano, 2007. "Credit Cycles in a OLG Economy with Money and Bequest," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 103, Money Macro and Finance Research Group.
  5. Kunieda, Takuma & Shibata, Akihisa, 2011. "Collateral Constraints and Legal Protection of Lenders: A Macroeconomic Perspective," MPRA Paper 35356, University Library of Munich, Germany.
  6. Assenza, Tiziana & Agliari, Anna & Delli Gatti, Domenico & Santoro, Emiliano, 2009. "Borrowing constraints and complex dynamics in an OLG framework," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(2), pages 656-669, November.
  7. Chakraborty, Suparna, 2006. "Amplifying Business Cycles through Credit Constraints," MPRA Paper 1808, University Library of Munich, Germany.
  8. Reuven Glick, 1998. "Thoughts on the origins of the Asia crisis: impulses and propagation mechanisms," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 98-07, Federal Reserve Bank of San Francisco.
  9. Aaron Tornell, 2003. "Soft Landings (February 2000), with Martin Schneider," UCLA Economics Online Papers 241, UCLA Department of Economics.

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