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Distortions in Resource Allocation and Bank Lending: The Malfunction of Financial Intermediation

Listed author(s):
  • Akira Otani

    (Bank of Japan)

  • Shigenori Shiratsuka

    (Bank of Japan)

  • Takeshi Yamada

    (Bank of Japan)

In this paper, we empirically analyze the interaction between the distortions in the real side of the economy (real distortion) and those in the financial side of the economy (financial distortion) in Japan after the 1990s. We focus on protracted economic stagnation after the bursting of the asset price bubble, and the subsequent recovery in economic activity and restoration of financial system stability. We use the intersectoral differences in relative factor prices as an indicator for the real distortion, and use the gap between the actual and benchmark loan portfolios, based on the mean-variance approach to maximize risk adjusted returns from loan portfolios, as an indicator for financial distortion. We show that both distortions sharply deteriorated in the late 1990s and improved in the 2000s. In addition, we conduct panel data analyses using data at individual bank level as well as at industry level to examine the interaction between the two distortions: the interaction was negative in the late 1990s, but reversed to positive in the 2000s.

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File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2007/data/wp07e06.pdf
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Paper provided by Bank of Japan in its series Bank of Japan Working Paper Series with number 07-E-6.

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Date of creation: Mar 2007
Handle: RePEc:boj:bojwps:07-e-6
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  1. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
  2. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
  3. Fumio Hayashi & Edward C. Prescott, 2002. "The 1990s in Japan: A Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January.
  4. Nagahata, Takashi & Sekine, Toshitaka, 2005. "Firm investment, monetary transmission and balance-sheet problems in Japan: an investigation using micro data," Japan and the World Economy, Elsevier, vol. 17(3), pages 345-369, August.
  5. Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2010. "Cross-Border Diversification in Bank Asset Portfolios," International Finance, Wiley Blackwell, vol. 13(1), pages 79-108, 03.
  6. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
  7. Jones, Ronald W, 1971. "Distortions in Factor Markets and the General Equilibrium Model of Production," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 437-459, May-June.
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