IDEAS home Printed from https://ideas.repec.org/a/bla/reviec/v10y2002i1p53-63.html
   My bibliography  Save this article

A Theoretical Model of Financial Crisis

Author

Listed:
  • Chan-Lau, Jorge A
  • Chen, Zhaohui

Abstract

The paper develops a new model of private debt financing with an inefficient financial system at its core, where inefficiency is characterized by costly loan monitoring. The model suggests a mechanism that generates the following series of events: a period of low capital inflow despite high rates of economic growth (capital inflow inertia), as observed in the take-off era in the Asian tiger economies; followed by a sudden acceleration of capital inflow (as seen in the 1990s); and then by a crisis, which is defined as a large reduction in the amount of loans intermediated by the financial system (i.e., a large capital outflow or credit crunch). Under certain conditions, financial crisis can occur even when economic fundamentals and market sentiment change only slightly. Unlike most credit rationing models, the results presented here do not hinge on the assumption of asymmetric information. The model also provides guidance about the appropriate policy responses to an imminent crisis. Copyright 2002 by Blackwell Publishing Ltd.

Suggested Citation

  • Chan-Lau, Jorge A & Chen, Zhaohui, 2002. "A Theoretical Model of Financial Crisis," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 53-63, February.
  • Handle: RePEc:bla:reviec:v:10:y:2002:i:1:p:53-63
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/servlet/useragent?func=synergy&synergyAction=showTOC&journalCode=roie&volume=10&issue=1&year=2002&part=null
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Berrak Buyukkarabacak & Stefan Krause, 2005. "Studying the Effects of Household and Firm Credit on the Trade Balance: The Allocation of Funds Matters," Emory Economics 0510, Department of Economics, Emory University (Atlanta).
    2. Alexis Derviz, 2007. "Cross-Border Risk Transmission by a Multinational Bank," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 87-111, March.
    3. Alexis Derviz & Jiri Podpiera, 2006. "Cross-Border Lending Contagion in Multinational Banks," Working Papers 2006/9, Czech National Bank, Research Department.
    4. Gao, Jianbo & Hu, Jing, 2014. "Financial crisis, Omori's law, and negative entropy flow," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 79-86.
    5. Shaffer, Sherrill & Hoover, Scott, 2008. "Endogenous screening, credit crunches, and competition in laxity," Review of Financial Economics, Elsevier, vol. 17(4), pages 296-314, December.
    6. Sînâ T. Ateş & Felipe E. Saffie, 2014. "Fewer but Better: Sudden Stops, Firm Entry, and Financial Selection," PIER Working Paper Archive 14-043, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reviec:v:10:y:2002:i:1:p:53-63. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.