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Is there a credit crunch in East Asia?

Author: Wei Ding; Ilker Domaç; Giovanni Ferri; World Bank. East Asia and Pacific Regional Office.
Publisher: Washington, DC : World Bank, East Asia and Pacific Region, [1998]
Series: Policy research working papers, 1959.
Edition/Format:   eBook : Document : International government publication : EnglishView all editions and formats
Database:WorldCat
Summary:
To what extent can tight monetary policy help restore market confidence in the aftermath of financial crises? Analyzing the East Asian experience, this study concludes that protracted and heavy reliance on tight monetary policy might even be counterproductive. The study finds that the credit crunch is widespread, and its negative impact particularly affects small banks and enterprises. The issue of the credit crunch  Read more...
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Additional Physical Format: Print version:
Ding, Wei, 1960-
Is there a credit crunch in East Asia?.
Washington, DC : World Bank, East Asia and Pacific Region, [1998]
(DLC) 00709050
(OCoLC)39793081
Material Type: Document, Government publication, International government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Wei Ding; Ilker Domaç; Giovanni Ferri; World Bank. East Asia and Pacific Regional Office.
OCLC Number: 680547667
Notes: "August 1998"--Cover.
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (38 pages) : illustrations.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Policy research working papers, 1959.
Responsibility: by Wei Ding, Ilker Domaç, Giovanni Ferri.

Abstract:

To what extent can tight monetary policy help restore market confidence in the aftermath of financial crises? Analyzing the East Asian experience, this study concludes that protracted and heavy reliance on tight monetary policy might even be counterproductive. The study finds that the credit crunch is widespread, and its negative impact particularly affects small banks and enterprises. The issue of the credit crunch in the aftermath of the Asian crisis has stimulated much debate. Indeed, some features of the East Asian economies, such as bank-based financial systems and high leverage, make them particularly vulnerable to monetary and financial shocks. Under such circumstances, the credit channel of transmission of these shocks is likely to lead to a credit crunch, affecting the flow of bank loans to those agents-households and small and medium-sized enterprises-for whom close substitutes for bank credit are unavailable. In turn, the disruption to the availability of finance for bank-dependent borrowers may stymie economic activity. In practice, however, it is difficult to detect the credit channel effects that lead to a credit crunch. Reliance on trends of credit aggregates alone is inadequate to prove that there has been an adverse shift in the supply of loans: even a decline or slowdown of credit could stem from a decrease or deceleration in demand. A frequently used methodology to overcome this problem focuses on both credit aggregates and the yield spread between bank loans and risk-free assets, such as government bonds. If this spread rises while credit aggregates slow down, one can conjecture that the supply of loans has either decreased more or increased less than demand. But further qualification is needed. The increase of the spread might simply reflect a rising risk premium triggered by the fact that the negative shock reduces the net worth of economic agents because of larger financial outlays. Accordingly, the relevant spread to capture the worsening credit conditions that affect bank-dependent borrowers is the spread between bank lending rates and corporate bonds. The yield spread between corporate and government bonds measures the general risk premium. The study applies this methodology to Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand and shows that the credit crunch is widespread, while its negative impact particularly affects small banks and enterprises. On the basis of the findings, the authors claim that: (1) a protracted and heavy reliance on tight monetary policy, entailing high real interest rates, appears inappropriate for restoring market confidence; (2) it is desirable to consider alternative policy instruments that do not place further stress on the banking sector and on its lending to the corporate sector; and (3) policy actions are warranted to alleviate the strain that the crisis has put on small banks and enterprises. This paper-a product of the East Asia and the Pacific Region-is part of a larger effort in the region to analyze the patterns and consequences of the East Asian crisis, with particular reference to the link between real and financial sector. The authors may be contacted at wding@worldbank.org, idomac@worldbank.org, or gferri@worldbank.org.

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