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The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation

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Listed author(s):
  • Dekle, Robert
  • Kletzer, Kenneth

Abstract

An endogenous growth model with financial intermediation is used to show how government policies towards the financial sector can lead to banking crises and persistent growth slumps. The model shows how government deposit guarantees and regulatory forbearance can lead to permanent declines in the growth rate of the economy. The effects of inadequate prudential supervision on asset price dynamics under perfect foresight are also derived in the model. The policies that are used in the analysis are based on essential features of Japanese financial regulation. The implications of the model are compared to the experience of the Japanese economy and financial system during the 1990s. We find that the dynamics predicted by our model are generally consistent with the recent behavior of economic aggregates, asset prices and the banking system for Japan. A policy implication of the model is that the impact on future economic growth depends upon the length of time the government fails to enforce loan-loss reserving by banks.

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Paper provided by Center for International Economics, UC Santa Cruz in its series Santa Cruz Center for International Economics, Working Paper Series with number qt0t6321ds.

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Date of creation: 01 Mar 2003
Handle: RePEc:cdl:scciec:qt0t6321ds
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  1. 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.
  2. Bayoumi, Tamim, 2001. "The morning after: explaining the slowdown in Japanese growth in the 1990s," Journal of International Economics, Elsevier, vol. 53(2), pages 241-259, April.
  3. Kwon, Eunkyung, 1998. "Monetary Policy, Land Prices, and Collateral Effects on Economic Fluctuations: Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 12(3), pages 175-203, September.
  4. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters,in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  5. Robert Dekle & Kenneth Kletzer, 2002. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 507-558 National Bureau of Economic Research, Inc.
  6. Ogawa, K. & Kitasaka, S.-I., 2000. "Bank Lending in Japan: its Determinants and Macroeconomic Implications," ISER Discussion Paper 0505, Institute of Social and Economic Research, Osaka University.
  7. 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.
  8. Robert Dekle & Kenneth M. Kletzer, 2002. "Financial intermediation, agency and collateral and the dynamics of banking crises: theory and evidence for the Japanese banking crisis," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  9. Hutchison, Michael & McDill, Kathleen, 1999. "Are All Banking Crises Alike? The Japanese Experience in International Comparison," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 155-180, September.
  10. Takeo Hoshi & Anil Kashyap, 2004. "Corporate Financing and Governance in Japan: The Road to the Future," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582481, July.
  11. Barseghyan, Levon, 2010. "Non-performing loans, prospective bailouts, and Japan's slowdown," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 873-890, October.
  12. 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.
  13. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, July.
  14. Aaron Tornell & Frank Westermann, 2003. "Credit Market Imperfections in Middle Income Countries," CESifo Working Paper Series 960, CESifo Group Munich.
  15. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, July.
  16. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  17. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  18. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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