Financial Crisis and Credit Crunch As a Result of Inefficient Financial Intermediation: With Reference to the Asian Financial Crisis
International Monetary Fund, Sep 1, 1998 - Business & Economics - 24 pages
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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affected countries Asian countries Asian crisis Asian ﬁnancial crisis asset value assumption billion bubble capital ﬂows capital inﬂow inertia capital outﬂow Chan-Lau and Chen changes in capital comparative statics Corollary country’s credit crunch credit rationing crisis in Asia crisis potential debt ﬁnancing deﬁned deﬁnition Demand for loans discrete change domestic interest rate economic fundamentals emerging market equal equity exists expected return external debt ﬁnancial ﬂows financial intermediary ﬁnancial market ﬁnancial sector ﬁnancial system ﬁrm ﬁrst ﬁve ﬁxed cost foreign credit supply foreign depositor fundamental strength fundamental variables growth increase Indonesia inflow Intermediate the amount large capital outﬂow large reversal Lemma local maximum Malaysia market sentiment models of ﬁnancial monitoring cost monitoring is performed multiple equilibria models observed optimal outflow paper parameter policy response probability of success reduce reversal of capital risk-free asset risk-free rate safety buffer satisﬁes switching point Thailand unmonitored valuation willingness to lend