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Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis

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Author Info
Jorge A. Chan-Lau (International Monetary Fund)
Zhaohui Chen (International Monetary Fund and CEPR)

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Abstract

This paper develops a new model of international private debt financing. It shows the possibility of discontinuity in the amount of financial intermediation when the intermediary is inefficient. The model suggests a mechanism that can generate the following sequence of events: A period of relatively low capital flow despite a steady improvement in economic fundamentals (capital inflow inertia), followed by a fast buildup of capital inflow, and ended with a large capital outflow (crisis), as observed in the recent Asian financial crisis. In addition, there exists a minimum level of economic fundamental strength that can sustain large capital inflows. If the fundamental strength is not far above this minimum level, the economy will be vulnerable to shifts in market sentiment and to even a small deterioration of fundamentals. We use comparative statics to evaluate the pros and cons of various policy responses to the crisis.

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Publisher Info
Paper provided by EconWPA in its series International Finance with number 9804001.

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Length: 23 pages
Date of creation: 21 Apr 1998
Date of revision: 24 Apr 1998
Handle: RePEc:wpa:wuwpif:9804001

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Related research
Keywords: Financial crisis; Asian crisis; credit crunch; financial intermediary; capital flow; capital inflow inertia;

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank. [Downloadable!]
  4. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
    Other versions:
  6. Efraim Sadka & Assaf Razin & Chi-Wa Yuen, 1996. "A Pecking Order Theory of Capital Inflows and International Tax Principles," IMF Working Papers 96/26, International Monetary Fund.
    Other versions:
  7. Frederic S. Mishkin, 1992. "Anatomy of a Financial Crisis," NBER Working Papers 3934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises : The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
  9. Paul R. Masson, 1998. "Contagion-Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
  10. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," Working Paper 97-16, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  11. Mohsin S. Khan & Zhaohui Chen, 1997. "Patterns of Capital Flows to Emerging Markets: A Theoretical Perspective," IMF Working Papers 97/13, International Monetary Fund.
  12. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January. [Downloadable!] (restricted)
  13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  14. Shoven, John B & Smart, Scott B & Waldfogel, Joel, 1992. "Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 155-67, Winter. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Franklin Allen & Douglas Gale, 1999. "Financial Contagion," Levine's Working Paper Archive 2092, David K. Levine. [Downloadable!]
    Other versions:
  2. Piti Disyatat, . "Currency Crises and The Real Economy: The Role of Banks," IMF Working Papers 01/49, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Alberto Jaramillo & Adriana Ángel Jiménez & Andrea Restrepo Ramírez & Ana Consuelo Serrano, 2002. "Sector bancario y coyuntura económica. El caso colombiano 1990-2000," Grupo de estudios en economía y empresa 003921, EAFIT-GRUPO DE ESTUDIOS EN ECONOMIA Y EMPRESA (GEE). [Downloadable!]
  4. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," World Bank Research Observer, Oxford University Press, vol. 15(1), pages 23-46, February. [Downloadable!]
  5. Mingwei Yuan & Christian Zimmermann, 1999. "Credit Crunch in a Model of Financial Intermediation and Occupational Choice," Cahiers de recherche CREFE / CREFE Working Papers 97, CREFE, Université du Québec à Montréal. [Downloadable!]
    Other versions:
  6. Laura E. Kodres & Matthew Pritsker, 1998. "A rational expectations model of financial contagion," Finance and Economics Discussion Series 1998-48, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Laeven, Luc & Klingebiel, Daniela & Kroszner, Randy, 2002. "Financial crises, financial dependence, and industry growth," Policy Research Working Paper Series 2855, The World Bank. [Downloadable!]
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