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

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

ASEAN+3 Macroeconomic Research (AMRO); National University of Singapore (NUS) - Risk Management Institute

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 Antonio 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

Jorge Antonio Chan-Lau (Contact Author)

ASEAN+3 Macroeconomic Research (AMRO) ( email )

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

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Zhaohui Chen

International Monetary Fund (IMF) ( email )

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