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Deposit insurance, regulatory forbearance and economic growth: implications for the Japanese banking crisis

  • Robert Dekle
  • Kenneth Kletzer
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    An endogenous growth model with financial intermediation is used to show how public deposit insurance and weak prudential regulation can lead to banking crises and permanent declines in economic growth. The impact of regulatory forbearance on investment, saving and asset price dynamics under perfect foresight are derived in the model. The assumptions of the theoretical model are based on essential features of the Japanese financial system and its regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s. An implication of our analysis is that delaying the resolution of banking crises adversely affects future economic growth.

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    File URL: http://www.frbsf.org/economic-research/files/wp04-26bk.pdf
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    Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2004-26.

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    Date of creation: 2004
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    Handle: RePEc:fip:fedfwp:2004-26
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    1. 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.
    2. 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.
    3. Robert Dekle & Kenneth Kletzer, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," CIRJE F-Series CIRJE-F-225, CIRJE, Faculty of Economics, University of Tokyo.
    4. 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.
    5. Barseghyan, Levon, 2010. "Non-performing loans, prospective bailouts, and Japan's slowdown," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 873-890, October.
    6. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
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