Financial Crisis and Credit Crunch As a Result of Inefficient Financial Intermediation: With Reference to the Asian Financial Crisis

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International Monetary Fund, Sep 1, 1998 - Business & Economics - 24 pages
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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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III Comparative Statics and Policy Responses to a Financial Crisis
IV Concluding Remarks

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