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

  • Zhaohui Chen
  • Jorge A. Chan-Lau

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/127.

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Length: 24
Date of creation: 01 Sep 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/127
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