Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis

September 1, 1998

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Zhaohui Chen, and Jorge A Chan-Lau. Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis, (USA: International Monetary Fund, 1998) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital inflows, Credit, Financial crises, Financial institutions, Loans, Money, Nonbank financial institutions

Keywords: Asia and Pacific, Asian crisis, Capital flow, Capital inflow inertia, Capital inflows, Credit, Credit crunch, Credit market, Credit supply, Expected return, Financial crisis, Financial intermediary, Fixed cost, Loans, Loans crisis, Nonbank financial institutions, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/127
Stock No:

WPIEA1271998
ISBN:

9781451935998
ISSN:

1018-5941

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