Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation--With Reference to the Asian Financial Crisis

24 Pages Posted: 17 Sep 1998  

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department; National University of Singapore (NUS) - Risk Management Institute; Tufts University - Fletcher School of Law and Diplomacy

Zhaohui Chen

International Monetary Fund (IMF)

Date Written: August 1998

Abstract

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.

Keywords: Financial crisis, Asian crisis, credit crunch, financial intermediary, capital flow, capital inflow inertia

JEL Classification: E44, F34, G21

Suggested Citation

Chan-Lau, Jorge A. and Chen, Zhaohui, Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation--With Reference to the Asian Financial Crisis (August 1998). IMF Working Paper No. 98/127. Available at SSRN: https://ssrn.com/abstract=96622 or http://dx.doi.org/10.2139/ssrn.96622

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Tufts University - Fletcher School of Law and Diplomacy ( email )

160 Packard Ave
Medford, MA 02155
United States

HOME PAGE: http://fletcher.tufts.edu/ceme/index.shtml

Zhaohui Chen

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6480 (Phone)
202-623-4740 (Fax)

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