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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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  1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  2. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises; The Early Warnings of Distress," IMF Working Papers 99/178, International Monetary Fund.
  3. 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.
  4. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
  5. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  6. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises ; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
  7. Paul R. Masson, 1998. "Contagion; Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
  8. John B. Shoven & Scott B. Smart & Joel Waldfogel, 1992. "Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 155-167, Winter.
  9. Mishkin, Frederic S, 1992. "Anatomy of a Financial Crisis," Journal of Evolutionary Economics, Springer, vol. 2(2), pages 115-30, August.
  10. By Jorge A. Chan-Lau & Zhaohui Chen, 2001. "Crash-Free Sequencing Strategies for Financial Development and Liberalization," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 7.
  11. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1996. "A Pecking Order Theory of Capital Inflows and International Tax Principles," CEPR Discussion Papers 1381, C.E.P.R. Discussion Papers.
  12. Pierre-Richard Agenor & Joshua Aizenman, 1998. "Volatility and the Welfare Costs of Financial Market Integration," NBER Working Papers 6782, National Bureau of Economic Research, Inc.
  13. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
  14. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  15. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  16. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  17. Zhaohui Chen & Mohsin S. Khan, 1997. "Patterns of Capital Flows to Emerging Markets; A Theoretical Perspective," IMF Working Papers 97/13, International Monetary Fund.
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