Capital Flows and Economic Fluctuations: The Role of Commercial Banks in Transmitting Shocks

January 1, 2008

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Format: Chicago

Yong Sarah Zhou. Capital Flows and Economic Fluctuations: The Role of Commercial Banks in Transmitting Shocks, (USA: International Monetary Fund, 2008) accessed December 26, 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 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.

Subject: Bank credit, Banking, Capital flows, Commercial banks, Credit

Keywords: Interest rate, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/012
Stock No:

WPIEA2008012
ISBN:

9781451868746
ISSN:

1018-5941

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