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 language | English |
|---|---|
| Pages (from-to) | 181-201 |
| Number of pages | 21 |
| Journal | Japan and the World Economy |
| Volume | 14 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 2002 Apr 10 |
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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 journal › Article
}
TY - JOUR
T1 - Overinvestment, collateral lending, and economic crisis
AU - Kim, Yong Jin
AU - Lee, Jong-Wha
PY - 2002/4/10
Y1 - 2002/4/10
N2 - 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.
AB - 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.
KW - Asian financial crisis
KW - Bank run
KW - Capital market liberization
KW - Industrial policy
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UR - http://www.scopus.com/inward/citedby.url?scp=0036201638&partnerID=8YFLogxK
U2 - 10.1016/S0922-1425(01)00085-8
DO - 10.1016/S0922-1425(01)00085-8
M3 - Article
AN - SCOPUS:0036201638
VL - 14
SP - 181
EP - 201
JO - Japan and the World Economy
JF - Japan and the World Economy
SN - 0922-1425
IS - 2
ER -