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Credit Crunch And Household Welfare, The Case Of The Korean Financial Crisis

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  • SUNG JIN KANG
  • YASUYUKI SAWADA

Abstract

The financial crisis in 1997 caused serious deterioration of the Korean economy. We examined the credit crunch in Korea and how it affected household welfare. With household panel data from 1996-1998, we estimated a switching regression model of a consumption Euler equation, which is augmented by endogenous credit constraints. Several empirical findings emerged. First, households coped with the negative shocks by reducing consumption of luxury items while maintaining food, education, and health-related expenditures. Second, the estimated results suggest that the standard consumption Euler equation, i.e., the necessary condition of the life-cycle permanent income hypothesis, does not hold because of binding credit constraints. Especially between 1997 and 1998, the probability of facing credit constraints increased significantly for all households. The expected welfare loss from binding credit constraints increased by 45% during the crisis, suggesting the seriousness of the credit crunch at the household level.
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  • Sung Jin Kang & Yasuyuki Sawada, 2008. "Credit Crunch And Household Welfare, The Case Of The Korean Financial Crisis," The Japanese Economic Review, Japanese Economic Association, vol. 59(4), pages 438-458.
  • Handle: RePEc:bla:jecrev:v:59:y:2008:i:4:p:438-458
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    Cited by:

    1. Nicola Jones & Hannah Marsden, 2010. "Assessing the Impacts of and Response to the 1997-98 Asian Financial Crisis through a Child Rights Lens," Working papers 1002, UNICEF,Division of Policy and Strategy.
    2. repec:bla:asiapr:v:12:y:2017:i:1:p:18-40 is not listed on IDEAS
    3. Kaytaz, Mehmet & Gul, Misra C., 2014. "Consumer response to economic crisis and lessons for marketers: The Turkish experience," Journal of Business Research, Elsevier, vol. 67(1), pages 2701-2706.
    4. SAWADA Yasuyuki & Rima BHATTCHARYAY & KOTERA Tomoaki, 2011. "Aggregate Impacts of Natural and Man-made Disasters: A quantitative comparison," Discussion papers 11023, Research Institute of Economy, Trade and Industry (RIETI).
    5. Goh, Chor-ching & Kang, Sung Jin & Sawada, Y asuyuki, 2005. "How did Korean households cope with negative shocks from the financial crisis?," Journal of Asian Economics, Elsevier, vol. 16(2), pages 239-254, April.
    6. Persefoni Polychronidou & Ioannis Petasakis & Giannoula Florou & Anastasios Karasavvoglou, 2014. "Consuming Foods and Household Products in Greece: A Statistical Analysis," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 99-110.
    7. Yasuyuki Sawada & Kazumitsu Nawata & Masako Ii & Jeong-Joon Lee, 2007. "Did the Credit Crunch in Japan Affect Household Welfare? An Augmented Euler Equation Approach Using Type 5 Tobit Model," CARF F-Series CARF-F-099, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.
    9. Pushan Dutt & V. Padmanabhan, 2011. "Crisis and Consumption Smoothing," Marketing Science, INFORMS, vol. 30(3), pages 491-512, 05-06.

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