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Credit Markets and the Propagation of Korea's 1997 Financial Crisis

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  • Peter L. Rousseau
  • Jong Hun Kim

Abstract

We consider the roles of monetary shocks and tightening credit market conditions in the transmission of South Korea's 1997 financial crisis to the real sector, and compare the relative impacts of these factors on production in light and heavy industries. Using structural regression equations, vector autoregressive models, and the accompanying dynamic forecasts, we find that the ratio of commercial bills dishonored to the total value of bills to be cleared can explain the decline in industrial production more fully than either the decline in the real stock of money or the spread between yields on corporate and government bonds. These results are most emphatic in light industry, for which small and medium‐sized firms account for more than 70% of the total value added. Since fluctuations in the dishonored bills ratio may reflect components related to increases in the cost of credit intermediation and its effect on small and medium‐sized firms more precisely than the corporate‐government bond spread, we interpret the evidence as suggestive of a credit channel and “flight to quality” at work.

Suggested Citation

  • Peter L. Rousseau & Jong Hun Kim, 2007. "Credit Markets and the Propagation of Korea's 1997 Financial Crisis," Southern Economic Journal, John Wiley & Sons, vol. 74(2), pages 524-545, October.
    • Handle: RePEc:wly:soecon:v:74:y:2007:i:2:p:524-545
    DOI: 10.1002/j.2325-8012.2007.tb00851.x
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