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Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis

Author

Listed:
  • Zhaohui Chen
  • Mr. Jorge A Chan-Lau

Abstract

This paper develops a model of private debt financing under inefficient financial intermediation. It suggests a mechanism that can generate the following sequence of events observed in the recent Asian crisis: A period of relatively low capital flow despite a steady improvement in economic fundamentals (capital inflow inertia), followed by a fast buildup of capital inflow, and ended with a large capital outflow and domestic credit crunch. Unlike other models requiring large movements in fundamentals or asset prices to explain a financial crisis, this model can exhibit large credit/capital flow swings with moderate changes in the economic and market environment.

Suggested Citation

  • Zhaohui Chen & Mr. Jorge A Chan-Lau, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," IMF Working Papers 1998/127, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/127
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    Cited by:

    1. Disyatat, Piti, 2004. "Currency crises and the real economy: The role of banks," European Economic Review, Elsevier, vol. 48(1), pages 75-90, February.
    2. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, April.
    3. Mingwei Yuan & Christian Zimmermann, 1999. "Credit Crunch, Bank Lending and Monetary Policy: A Model of Financial Intermediation with Heterogeneous Projects," Cahiers de recherche CREFE / CREFE Working Papers 89, CREFE, Université du Québec à Montréal.
    4. Grzegorz W. Kolodko, 2001. "La mutation post-socialiste," Revue d'Économie Financière, Programme National Persée, vol. 6(1), pages 161-174.
    5. TengTeng Xu, 2012. "The Role of Credit in International Business Cycles," Staff Working Papers 12-36, Bank of Canada.
    6. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    7. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," The World Bank Research Observer, World Bank, vol. 15(1), pages 23-46, February.
    8. Bhattacharya, Utpal, 2005. "Financial liberalization and the stability of currency pegs," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 351-374, March.
    9. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: a small contribution to the international financial architecture," LSE Research Online Documents on Economics 20224, London School of Economics and Political Science, LSE Library.
    10. Laura E. Kodres & Matthew Pritsker, 1998. "A rational expectations model of financial contagion," Finance and Economics Discussion Series 1998-48, Board of Governors of the Federal Reserve System (U.S.).
    11. Mojmir Hampl & Roman Matousek, 2000. "Credit Contraction in the Czech Republic: Causes and Effects," Archive of Monetary Policy Division Working Papers 2000/19, Czech National Bank.
    12. Souphala Chomsisengphet & Magda Kandil, 2007. "Towards Understanding the Asian Crisis and its Aftermath," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 12(4), pages 452-484.
    13. Yuan, Mingwei & Zimmermann, Christian, 2004. "Credit crunch in a model of financial intermediation and occupational choice," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 637-659, December.
    14. Gabrisch, Hubert, 2002. "Financial fragility and exchange rate arrangements of EU candidate countries," IWH Discussion Papers 156/2002, Halle Institute for Economic Research (IWH).
    15. Grzegorz W. Kolodko, 2001. "Postsocialist Transformation," Revue d'Économie Financière, Programme National Persée, vol. 6(1), pages 147-159.
    16. Chunchi Wu & Chun-nan Chen & Yan He, 2003. "The Performance of East Asian Economies and Financial Markets since the 1997 Financial Crisis," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 113-140.
    17. Laeven, Luc & Klingebiel, Daniela & Kroszner, Randy, 2002. "Financial crises, financial dependence, and industry growth," Policy Research Working Paper Series 2855, The World Bank.
    18. Frederick Adjei, 2012. "Debt dependence and corporate performance in a financial crisis: evidence from the sub-prime mortgage crisis," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(1), pages 176-189, January.
    19. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
    20. Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, vol. 67(1), pages 1-27, February.
    21. Janice Boucher Breuer, 2004. "An Exegesis on Currency and Banking Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 18(3), pages 293-320, July.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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