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Credit Crunches and Household Welfare: The Case of Korean Financial Crisis

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  • Yasuyuki Sawada
  • Sung Jin Kang

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.

Suggested Citation

  • Yasuyuki Sawada & Sung Jin Kang, 2004. "Credit Crunches and Household Welfare: The Case of Korean Financial Crisis," Econometric Society 2004 Far Eastern Meetings 751, Econometric Society.
  • Handle: RePEc:ecm:feam04:751
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    References listed on IDEAS

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    Cited by:

    1. TAMURA Sakuya & SAWADA Yasuyuki, 2009. "Consumption Insurance against Unforeseen Epidemics:The Case of Avian Influenza in Vietnam," Discussion papers 09023, Research Institute of Economy, Trade and Industry (RIETI).
    2. Yasuyuki Sawada, 2007. "The impact of natural and manmade disasters on household welfare," Agricultural Economics, International Association of Agricultural Economists, vol. 37(s1), pages 59-73, December.

    More about this item

    Keywords

    Asian financial crisis; credit crunch; consumption Euler equation with endogenous credit constraints;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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