TITLE

Credit distortion and financial crisis

AUTHOR(S)
Chen, Jing
PUB. DATE
November 2004
SOURCE
International Review of Financial Analysis;2004, Vol. 13 Issue 4, p559
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
A simple and consistent theory based on credit distortion is developed to understand the origin of financial crises in the emerging markets. We prove that without the guarantee of various government agencies on the credit risk of foreign loans, the interest rate on foreign loans would be the same as the domestic loans, which would eliminate the incentive to borrow foreign loans on a great scale. We demonstrate that the common phenomena preluding the crisis, such as heavy foreign borrowing and overinvestment in real estate, are rational choices when a particular currency is overvalued and cheap credit is available.
ACCESSION #
14459030

 

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