A model of self-fulfilling financial crises

Yong J. Kim, Jong-Wha Lee

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

This paper combines the structural weakness and the self-fulfilling panic view to explain the cause of the East Asian crises. In this model economy, the diversification strategies induce conglomerate firms to overinvest. They accumulate losses due to their unprofitable sectors and then compensate by obtaining bank loans. Domestic banks, which borrow from foreign banks, lend money as long as the total amount of accumulated loans remains within the firms' collateral value. The model shows that if the debt to collateral value ratio belongs to a certain range a self-fulfilling crisis can occur due to the self-fulfilling expectations of foreign investors.

Original languageEnglish
Pages (from-to)87-100
Number of pages14
JournalJapanese Economic Review
Volume57
Issue number1
DOIs
Publication statusPublished - 2006 Mar 1

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Financial crisis
Foreign banks
Bank loans
Self-fulfilling expectations
Foreign investors
East Asian crisis
Conglomerate
Loans
Diversification strategy
Debt

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

A model of self-fulfilling financial crises. / Kim, Yong J.; Lee, Jong-Wha.

In: Japanese Economic Review, Vol. 57, No. 1, 01.03.2006, p. 87-100.

Research output: Contribution to journalArticle

Kim, Yong J. ; Lee, Jong-Wha. / A model of self-fulfilling financial crises. In: Japanese Economic Review. 2006 ; Vol. 57, No. 1. pp. 87-100.
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