Credit Market Conditions and the Propagation of Korea's 1997 Financial Crisis

35 Pages Posted: 13 Aug 2006

See all articles by Peter L. Rousseau

Peter L. Rousseau

Vanderbilt University - Department of Economics

Jong-Hun Kim

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: August 2006

Abstract

We consider the roles of monetary shocks and tightening credit market conditions in the transmission of South Korea's 1997 financial crisis to the real sector, and compare the relative impacts of these factors on production in light and heavy industries. Using structural regression equations, vector autoregressive models, and the accompanying dynamic forecasts, we find that the ratio of commercial bills dishonored to the total value of bills to be cleared can explain the decline in industrial production more fully than either the decline in the real stock of money or the spread between yields on corporate and government bonds. These results are most emphatic in light industry, for which small and medium-sized firms account for more than 70 percent of the total value added. Since fluctuations in the dishonored bills ratio may reflect components related to increases in the cost of credit intermediation and its effect on small and medium-sized firms more precisely than the corporate-government bond spread, we interpret the evidence as suggestive of a credit channel and "flight-to-quality" at work.

Keywords: credit crunch, cost of credit intermediation, credit channel, flight to quality

JEL Classification: E5, F4

Suggested Citation

Rousseau, Peter L. and Kim, Jong-Hun, Credit Market Conditions and the Propagation of Korea's 1997 Financial Crisis (August 2006). Available at SSRN: https://ssrn.com/abstract=923894 or http://dx.doi.org/10.2139/ssrn.923894

Peter L. Rousseau (Contact Author)

Vanderbilt University - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-343-2466 (Phone)
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HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

Jong-Hun Kim

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States