Financial Sector Inefficiencies and Coordinate Failures: Implications for Crisis Management
AbstractThis paper analyzes the implication of inefficient financial intermediation for crisis management in a country where firms are highly-indebted. The analysis is based on a model in which firms rely on bank credit to finance their working capital needs and lenders face high state verification and enforcement costs of loan contracts. The analysis shows that higher contract enforcement and verification costs, lower expected productivity, or higher volatility, may shift the economy to the wrong side of the debt Laffer curve, with potentially sizable employment and output losses. The main implication of this analysis for the current policy debate on crisis management is East Asia is that dept reduction, in addition to debt rescheduling, may be required as part of the process of reducing financial sector inefficiencies.
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Date of creation: Dec 1999
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Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-11 (All new papers)
- NEP-FIN-2000-01-11 (Finance)
- NEP-IFN-2000-01-11 (International Finance)
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