Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis

Zhaohui Chen and Jorge Chan-Lau

No 1998/127, IMF Working Papers from International Monetary Fund

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: WP; financial crisis; Asian crisis; credit crunch; financial intermediary; capital flow; capital inflow inertia; credit supply; expected return; credit market; fixed cost; loans crisis; Capital inflows; Nonbank financial institutions; Credit; Loans; Asia and Pacific (search for similar items in EconPapers)
Pages: 24
Date: 1998-09-01
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Citations: View citations in EconPapers (25)

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Working Paper: Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1998/127

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