An Open Economy Model of the Credit Channel Applied to Four Asian Economies Four Asian Economies

Abstract

This working paper was written by Spiros Bougheas (University of Nottingham), Paul Mizen (University of Nottingham) and Cihan Yalcin (University of Nottingham and Central Bank of the Republic of Turkey).

This paper provides a theoretical model of an open economy credit channel including currency mismatch and financial fragility where exporting firms have access to international credit but non-exporting firms do not. It considers the post-crisis outcome which is predicted to be dramatically different for exporters/ non-exporters. We examine firms' access to external finance in four Asian economies after 1997 using a large panel of balance sheet data. Our paper demonstrates that firm heterogeneity is critical to understanding the open economy credit channel effects post-crisis since smaller and less profitable firms are indeed less likely to obtain credit than larger, export-oriented firms.

Keywords: Credit Channel, External Finance, Asian Crisis

JEL Classification: E32, E44, E51