Capital Flows and Economic Fluctuations: The Role of Commercials Banks in Transmitting Shocks
This paper uses a general equilibrium model to examine the central role played by commercial banks in intermediating and amplifying the capital flow shocks to the local economy in the 1997 Asia financial crisis. It finds that a sudden stop of capital inflows affects the equilibrium credit supply through two channels: first, the plunge of foreign financing decreases the loanable funds directly; and second the sudden stop drives up the cost of providing banking services, thereby additionally reducing the available bank credit to firms through a "deposit run". Empirical results from a VAR model broadly support the theoretical implications.
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amplified Asian crisis countries Asian financial Asian financial crisis bank credit bank lending banking cost banking sector banking system billion borrowing capital flow shocks cause lending rate cause real credit central bank cost multiplier countercyclical credit and deposit credit channel credit crunch credit-in-advance decrease demand deposits denotes deposit rate deposit spread deposit-in-advance constraint deposits and foreign deposits from households dividends domestic banks domestic currency domestic economy economic activities effective price employment equations financial crisis foreign bonds Granger causality tests implies Impulse Responses increase Indonesia industrial production inflows interest rate spread INTEREST SPREAD intermediated Korea lending spread loans Malaysia marginal cost marginal utility Null Hypothesis oppotunity cost Philippines private capital flows private sector providing banking services RB's real exchange rate real return real wage reserve requirement RF's RH's role sudden capital outflow sudden stop supply side Thailand transmission mechanism unit root wage bill wage earning