Overinvestment, collateral lending, and economic crisis

Yong Jin Kim, Jong-Wha Lee

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

This paper presents a model in which a high growth economy becomes susceptible to a sudden financial crisis. In the model firms are motivated to over-invest because of government subsidies, and bear the burden of the tax or other costs caused by the government subsidies. The model provides several predictions that may well be consistent with the recent experience of east Asian countries. First, a higher government subsidy generates higher investment and GDP growth rates, a higher level and growth of real estate price, and a higher level of current account deficits. Second, the rapid growth induced by government subsidies makes the economy very vulnerable to adverse shocks. When adverse shocks hit the economy and the expected loan-to-collateral value ratio rapidly increases, foreign investors become suspicious about the safety of domestic banks and begin to withdraw their loans. Subsequently, financial panic and economic crisis suddenly occur. Third, capital market liberalization, by provoking huge foreign capital inflows and outflows, increases the possibility of crisis and amplifies the scale of crisis.

Original languageEnglish
Pages (from-to)181-201
Number of pages21
JournalJapan and the World Economy
Volume14
Issue number2
DOIs
Publication statusPublished - 2002 Apr 10

Fingerprint

government subsidies
lending
economic crisis
financial crisis
loan
economy
current account
capital market
real estate
taxes
investor
liberalization
deficit
bank
firm
Government subsidies
Lending
Economic crisis
Overinvestment
costs

Keywords

  • Asian financial crisis
  • Bank run
  • Capital market liberization
  • Industrial policy

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Overinvestment, collateral lending, and economic crisis. / Kim, Yong Jin; Lee, Jong-Wha.

In: Japan and the World Economy, Vol. 14, No. 2, 10.04.2002, p. 181-201.

Research output: Contribution to journalArticle

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