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

  • Sun Jin Kang

    (The Institute of Policy and Planning Sciences, University of Tsukuba)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

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.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-234.

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Length: 29 pages
Date of creation: Jul 2003
Date of revision:
Handle: RePEc:tky:fseres:2003cf234
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