The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation

UC Santa Cruz Economics Working Paper No. 03-7

36 Pages Posted: 16 Jul 2003

See all articles by Robert Dekle

Robert Dekle

University of Southern California - Department of Economics

Kenneth M. Kletzer

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: March 2003

Abstract

An endogenous growth model with financial intermediation is used to show how government policies towards the financial sector can lead to banking crises and persistent growth slumps. The model shows how government deposit guarantees and regulatory forbearance can lead to permanent declines in the growth rate of the economy. The effects of inadequate prudential supervision on asset price dynamics under perfect foresight are also derived in the model. The policies that are used in the analysis are based on essential features of Japanese financial regulation. The implications of the model are compared to the experience of the Japanese economy and financial system during the 1990s. We find that the dynamics predicted by our model are generally consistent with the recent behavior of economic aggregates, asset prices and the banking system for Japan. A policy implication of the model is that the impact on future economic growth depends upon the length of time the government fails to enforce loan-loss reserving by banks.

Suggested Citation

Dekle, Robert and Kletzer, Kenneth M., The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation (March 2003). UC Santa Cruz Economics Working Paper No. 03-7. Available at SSRN: https://ssrn.com/abstract=410841 or http://dx.doi.org/10.2139/ssrn.410841

Robert Dekle

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

Kenneth M. Kletzer (Contact Author)

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
(408) 459-3407 (Phone)
(408) 459-5000 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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