Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis

46 Pages Posted: 28 Feb 2004

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: February 2004

Abstract

An endogenous growth model with financial intermediation is used to show how public deposit insurance and weak prudential regulation can lead to banking crises and permanent declines in economic growth. The impact of regulatory forbearance on investment, saving and asset price dynamics under perfect foresight are derived in the model. The assumptions of the theoretical model are based on essential features of the Japanese financial system and its regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s. An implication of our analysis is that delaying the resolution of banking crises adversely affects future economic growth.

JEL Classification: O16, O41

Suggested Citation

Dekle, Robert and Kletzer, Kenneth M., Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis (February 2004). CESifo Working Paper Series No. 1136; UC Santa Cruz International Economics Working Paper No. 554; UC Santa Cruz Economics Working Paper No. 04-01. Available at SSRN: https://ssrn.com/abstract=491942

Robert Dekle (Contact Author)

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

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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