Credit distortion and financial crisis

Chen, Jing
November 2004
International Review of Financial Analysis;2004, Vol. 13 Issue 4, p559
Academic Journal
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.


Related Articles

  • SHOE-LEATHER COSTS RECONSIDERED. Chadha, Jagjit S.; Haldane, Andrew G.; Janssen, Norbert G. J. // Economic Journal;Mar98, Vol. 108 Issue 447, p363 

    Lucas has recently suggested that the `shoe-leather' costs of inflation may amount to as much as 1% of GNP in the United States when moving to the Friedman optimum. We assess his thesis using empirical evidence for the United Kingdom over the period 1870-1994. We find support for Lucas'...

  • UK mortgages: the buy-to-let bubble bursts.  // MarketWatch: Global Round-up;October 2004, Vol. 3 Issue 10, p99 

    This article reports that the Royal Institute of Chartered Surveyors (RICS) reported that rising base rates and uncertainty over future housing prices has deterred new landlords from entering the buy-to-let market, while some existing landlords are looking to sell-up. With exceptionally...

  • Trade Credit and the Bank Lending Channel. NILSEN, JEFFREY H. // Journal of Money, Credit & Banking (Ohio State University Press);Feb2002, Vol. 34 Issue 1, p226 

    The bank lending channel theory posits that during monetary contractions banks restrict some firms' loans, thus reducing their desired investment independently of interest rates. Previous research finds small firms reduce, while large firms accelerate, loan growth. We find that small firms...

  • Downward Revision To Rate Expectations.  // Emerging Europe Monitor: Central Europe & Baltic States;Nov2011, Vol. 18 Issue 11, p7 

    The article discusses an economic outlook for Czech Republic for 2011. The country was expected to have no rate hikes in the present year. The benchmark interest rate will remain on hold at .75 percent in the said year, and was forecasted to boost by 1.25 percent in 2012. Moreover, economists...

  • Rate danger.  // BRW;1/25/2006, Vol. 28 Issue 3, p17 

    The article reports on the concern whether the government can offer further tax cuts without risking a rise in interest rates in Australia.

  • The Interest Rate Component of Systematic Risk. Gordon, D. A.; Gordon, M. J.; Gould, L. I. // Journal of Accounting, Auditing & Finance;Fall90, Vol. 5 Issue 4, p573 

    Changes in the long-term interest rate would seem to be an important source of systematic risk for common shares, but the empirical results to date have been very disappointing. For the most part these results have been obtained with a model where an interest rate variable, say the holding...

  • CULBERTSON ON INTEREST STRUCTURE: COMMENT. Wehrle, L.S. // Quarterly Journal of Economics;Nov58, Vol. 72 Issue 4, p601 

    The article presents a comment on John Culbertson's recent article about interest structure of economics. Although current theory of the maturity structure of interest rates is incomplete, it is more acceptable body of doctrine than Culbertson's article. The author aims to set forth an...

  • INTEREST RATES AND BUSINESS CYCLE FLUCTUATIONS: A FOCUS ON HIGHER MOMENTS. Beccarini, A. // Journal for Studies in Economics & Econometrics;Aug2008, Vol. 32 Issue 2, p85 

    This work aims at analysing the relationships between market interest rates and the business fluctuations. Asymmetries in the business cycles affect saving decisions of agents and interest rates. The relationships between interest rates and the expected value, the variance, the skewness and the...

  • Almost sub-prime. Coppola, Angelo // Finweek;2/7/2008, p69 

    The article provides information regarding the issue on the announced fund in South Africa which is said to be a possible another bloodbath of defaults waiting to happen. Defaults on home loans rise rapidly and sub-prime mortgages gain global notoriety in the battle to adjust to frenetically...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics