Distortions in Resource Allocation and Bank Lending: The Malfunction of Financial Intermediation

Akira Otani, Shigenori Shiratsuka () and Takeshi Yamada
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Akira Otani: Bank of Japan
Takeshi Yamada: Bank of Japan

No 07-E-6, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In this paper, we empirically analyze the interaction between the distortions in the real side of the economy (real distortion) and those in the financial side of the economy (financial distortion) in Japan after the 1990s. We focus on protracted economic stagnation after the bursting of the asset price bubble, and the subsequent recovery in economic activity and restoration of financial system stability. We use the intersectoral differences in relative factor prices as an indicator for the real distortion, and use the gap between the actual and benchmark loan portfolios, based on the mean-variance approach to maximize risk adjusted returns from loan portfolios, as an indicator for financial distortion. We show that both distortions sharply deteriorated in the late 1990s and improved in the 2000s. In addition, we conduct panel data analyses using data at individual bank level as well as at industry level to examine the interaction between the two distortions: the interaction was negative in the late 1990s, but reversed to positive in the 2000s.

Keywords: Efficiency in Resource Allocation; Interaction between Real and Financial Distortions; Mean-Variance Approach (search for similar items in EconPapers)
JEL-codes: G21 G28 O47 (search for similar items in EconPapers)
Date: 2007-03
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