Upload
hoangphuc
View
235
Download
0
Embed Size (px)
Citation preview
UNIVERSITI PUTRA MALAYSIA
FINANCIAL INTERMEDIARY DEVELOPMENT, OUTPUT AND EXPORT
UNDER CREDIT MARKET IMPERFECTIONS
TANG KIN BOON
FEP 2007 10
FINANCIAL INTERMEDIARY DEVELOPMENT, OUTPUT AND EXPORT UNDER CREDIT MARKET IMPERFECTIONS
By
TANG KIN BOON
Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia, in Fulfilment of the Requirements for the Degree of Doctor of Philosophy
December 2007
Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment of the requirement for the degree of Doctor of Philosophy
FINANCIAL INTERMEDIARY DEVELOPMENT, OUTPUT AND EXPORT
UNDER CREDIT MARKET IMPERFECTIONS
By
TANG KIN BOON
December 2007
Chairman : Associate Professor Tan Hui Boon, PhD Faculty : Economics and Management This study examines the long-run relationship between financial intermediary
development, output and export under three credit market imperfections – role of
financial intermediaries, financial accelerator and currency mismatch. In particular,
this study has (1) examined the direct relationship between financial intermediary
development and output fluctuations (2) examined the dampening and magnifying
effects of financial intermediaries on output fluctuations via the propagation of real
and monetary shocks, (3) examined the impact of exchange rate movements on
exports under the condition of foreign currency borrowing and credit constraint and
(4) evaluated the impact of external finance premium on various sectorial
productions and aggregate outputs growth. An aggregate data panel is constructed
for the countries under study and the cointegration hypothesis among the variables
is verified using Pedroni’s and Westerlund’s panel cointegration tests. The
idiosyncratic, individual and group-mean panel cointegrating vectors are then
estimated using FMOLS and DOLS developed by Pedroni.
iii
Using data from 17 countries at different income levels in East Asia-Pacific, the
empirical results indicate that (1) strong and robust evidence for dampening effect
of real shocks, (2) somewhat weak evidence for magnifying effect of monetary
shocks, (3) financial intermediary development to some extent have direct impact on
output fluctuations if countries are bank-dependent, (4) the larger the level of
country’s foreign debt and credit constraint results more negative response of
exports to currency depreciation, (5) country’s export with high foreign currency
denominated debt are more vulnerable to negative exchange rate shocks and (6) the
negative relationship between the external finance premium and the aggregate
output growth seems to be strengthened in middle income than in the sectorial
production growth.
iv
Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi keperluan untuk ijazah Doktor Falsafah
PEMBANGUNAN PENGANTARA KEWANGAN, HASIL KELUARAN DAN
EKSPORT DI BAWAH KETIDAKSEMPURNAAN PASARAN KREDIT
Oleh
TANG KIN BOON
Disember 2007
Pengerusi : Profesor Madya Tan Hui Boon, PhD Fakulti : Ekonomi dan Pengurusan Penyelidikan ini mengkaji hubungan jangka panjang di antara pembangunan
pengantara kewangan, hasil keluaran dan eksport di bawah tiga ketidaksempurnaan
pasaran kredit – peranan pengantara kewangan, pemecut kewangan dan
ketidakpadanan mata wang. Secara khususnya, penyelidikan ini telah (1) mengkaji
hubungan langsung di antara pembangunan pengantara kewangan dan
ketidakstabilan hasil keluaran, (2) mengkaji kesan-kesan pelembapkan and
pembesaran pengantara kewangan ke atas ketidakstabilan hasil keluaran melalui
pembeluasan kejutan-kejutan asli dan kewangan, (3) mengkaji kesan tekanan kadar
tukaran asing ke atas eksport di bawah syarat peminjaman mata wang asing dan
kekangan kredit, (4) menilai kesan tekanan premium kewangan luar ke atas indeks
pengeluaran and hasil keluaran berjumlah. Data panel dibina untuk negara-negara di
bawah kajian dan hipotesis hubungan integrasi antara faktor-faktor telah disahkan
dengan menggunakan ujian-ujian panel hubangan integrasi yang direka oleh Pedroni
dan Westerlund. Vektor-vektor individu dan kumpulan rata ditaksir dengan
menggunakan teknik FMOLS and DOLS yang direka oleh Pedroni.
v
Dengan menggunakan data dari 17 negara-negara di Asia-Pacific Timur yang
separas dengan tingkat pendapatan yang berlainan, hasil-hasil empirik menunjukkan
(1) bukti yang kukuh dan konsisten mengenai kesan pelembapkan oleh kejutan asli,
(2) bukti yang lemah mengenai kesan pembesaran oleh kejutan kewangan, (3) pada
tahap tertentu pembangunan pengantara kewangan menunjukkan kesan langsung ke
atas ketidakstabilan hasil keluaran di negara-negara yang sangat bergantung kepada
bank, (4) hutang luaran dan kekangan kredit negara yang tinggi akan mengakibatkan
balasan negatif eksport, (5) hutang mata wang asing negara yang tinggi juga akan
mengakibatkan eksportnya lebih mudah diserang oleh kejutan-kejutan negatif
tukaran asing dan (6) hubungan premium kewangan luar dengan perkembangan
hasil keluaran berjumlah adalah lebih kukuh di negara-negara berpendapatan tengah
berbanding dengan hubungannya dengan perkembangan indeks pengeluaran.
vi
ACKNOWLEDGEMENTS I am deeply grateful to my supervisor, Associate Professor Dr. Tan Hui Boon, for
the confidence she has shown in me. I would like to express my deepest
appreciation to her for generous supervision, advice and patience throughout the
completion of this thesis. She has continued her valuable assistance by giving
suggestions and insights.
Valuable comments of two members of the supervisory committee, Associate
Professor Dr. Zulkornain Yusop and Dr. Zaleha Mohd Noor are greatly appreciated.
Without their support, this thesis would likely not have matured.
I have also benefited from valuable comments, suggestions and helps from Joakim
Westerlund, Peter Pedroni, Nasri Harb and Thorsten Beck.
vii
I certify that an Examination Committee has met on 12th December 2007 to conduct the final examination of Tang Kin Boon on his Doctor of Philosophy thesis entitled “Financial Intermediary Development, Output and Export under Credit Market Imperfections” in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1980 and Universiti Pertanian Malaysia (Higher Degree) Regulations 1981. The Committee recommends that the student be awarded the degree of Doctor of Philosophy. Members of the Examination Committee were as follows: Law Siong Hook, PhD Senior Lecturer Faculty of Economics and Management Universiti Putra Malaysia (Chairman) Taufiq Hassan, PhD Lecturer Faculty of Economics and Management Universiti Putra Malaysia (Internal Examiner) Zulkarnain Muhamad Sori, PhD Associate Professor Faculty of Economics and Management Universiti Putra Malaysia (Internal Examiner) Mansor Hj. Ibrahim, PhD Professor Kulliyyah Ekonomi dan Sains Pengurusan Universiti Islam Antarabangsa Malaysia (External Examiner) _______________________________
HASANAH MOHD. GHAZALI, PhD Professor and Deputy Dean School of Graduate Studies Universiti Putra Malaysia Date: 29 January 2008
viii
This thesis was submitted to the Senate of Universiti Putra Malaysia and has been accepted as fulfilment of the requirement for the degree of Doctor of Philosophy. The members of the Supervisory Committee were as follows: Tan Hui Boon, PhD Associate Professor Faculty of Economics and Management Universiti Putra Malaysia (Chairman) Zulkornain Yusop, PhD Associate Professor Faculty of Economics and Management Universiti Putra Malaysia (Member) Zaleha Mohd Noor, PhD Lecturer Faculty of Economics and Management Universiti Putra Malaysia (Member) _______________________________
AINI IDERIS, PhD Professor and Dean School of Graduate Studies Universiti Putra Malaysia Date: 21 February 2008
ix
DECLARATION I hereby declare that the thesis is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other degree at UPM or other institutions.
________________ TANG KIN BOON Date: 1 January 2008
x
TABLE OF CONTENTS
Page DEDICATION iiABSTRACT iiiABSTRAK vACKNOWLEDGEMENTS viiAPPROVAL viiiDECLARATION xLIST OF TABLES xivLIST OF FIGURES xviLIST OF ABBREVIATIONS/NOTATIONS/GLOSSARY OF TERMS xvii CHAPTER 1 INTRODUCTION
1.1. Background 11.1.1. External Finance Premium and Output Fluctuations 81.1.2. Balance Sheet Effects 121.1.3. Bank Lending Effects 151.1.4. Monetary Policy, Currency Mismatch and Exchange Rate
Movements 20
1.1.5. Asian Exports and Exchange Rate Movements During the Crisis
24
1.1.6. Credit Boom-Bust Cycle and Economic Growth 281.2. Problem Statement 30
1.2.1. Do Financial Intermediary Developments affect Output Fluctuations?
30
1.2.2. Do Credit Market Imperfections Amplify or Dampen Output Fluctuations?
31
1.2.3. Why East Asian Exports Stagnated or Fell after the Currency Crisis?
33
1.2.4. Does Agency Cost Reduce or Increase Output Growth? 351.2.5. Financial Constraints: Are SMEs more Credit Constrained
than LMs? 36
1.3. Objectives of the Study 381.4. Significance of the Study 39
2 LITERATURE REVIEW 43
2.1. Financial Intermediary Development and Output Fluctuations 442.1.1. Financial Accelerator 442.1.2. Credit Market Imperfections and Output Fluctuations 472.1.3. Do Intermediaries Dampen or Magnify Shocks? 552.1.4. Financial Accelerator and Macroeconomic Fluctuations:
Empirical Evidence 65
xi
2.1.5. Monetary Policy as an Exogenous Shock to Agency Costs 682.1.6. Extensions of the Credit Market Imperfections 69
2.2. Credit Market Imperfections and the Impact of Exchange Rate Movements on Exports
73
2.2.1 Exchange Rate Movements and International Trade under Foreign Currency Borrowing
73
2.2.2 Related Empirical Evidence of Foreign Currency Borrowing 762.2.3 Exchange Rate Movements and International Trade under
Credit Constraint 77
2.2.4 The Complimentary Effect of Foreign Currency Borrowing and Credit Constraint
80
2.3. Credit Channel 832.3.1 Balance Sheet Channel 832.3.2 Bank Lending Channel 872.3.3 Predictability of External Finance Premium 942.3.4 Balance Sheet Effects and Firms Size 96
2.4. Financial Intermediary Development and Growth 982.4.1. How does Financial Intermediary Development affect
Economic Growth? 98
2.4.2. Related Empirical Literature 101 3 THEORETICAL MODELING AND METHODOLOGY 107
3.1. Theoretical Models 1073.1.1. A Model of Financial Development and Output Fluctuations
based on Beck, Lundberg and Majnoni (2006) 107
3.1.2. Testable Hypotheses 1153.1.3. A Model of Agency Costs based on Bernanke, Gertler and
Gilchrist (1996) 116
3.1.4. Implications of External Finance Premium 1203.1.5. A Model of Export Functions based on Goldstein and Kahn
(1978) 122
3.2. Empirical Models 1253.2.1. Direct Effect of Financial Intermediary Development on
Output Fluctuations 126
3.2.2. Indirect Effect of Financial Intermediary Development on Output Fluctuations
128
3.2.3. Credit Market Imperfections and the Impact of Exchange Rate Movements on Exports
129
3.2.4. Testing for Amplification Effects 1333.2.5. Financing Opportunities Across Sectors 134
3.3. Panel Data Model 1353.4. Panel Unit Root Tests 135
3.4.1. Im, Pesaran and Shin (2003) test 1363.4.2. Fisher ADF and PP tests 137
3.5. Panel Cointegration Tests 1383.5.1. Pedroni Heterogeneous Panel Tests 139
xii
3.5.2. Westerlund Panel Invariance Tests 1433.5.3. Westerlund Panel CUSUM Test 1473.5.4. Westerlund Panel Structural Break Test 1483.5.5. Contribution of the Current Methods 150
4 RESULTS AND DISCUSSIONS 152
4.1. Financial Intermediaries Development and Output Fluctuations 1524.1.1 Direct Impact of Financial Intermediary Development on
Output Fluctuations 157
4.1.2 Dampening and Magnifying Effects of Financial Intermediary Development on Output Fluctuations
163
4.2. The Effects of Foreign Currency Borrowing and Financial Development on Export
177
4.2.1 Traditional Competitiveness Effect 1874.2.2 Effect of Foreign Currency Borrowing 1884.2.3 Effect of Financial Development 1894.2.4 Amplification Effect of Financial Development 1914.2.5 Amplification Effect of Exchange Rate 1924.2.6 Results based on ASEAN-5 196
4.3. The Effects of External Finance Premium on Sectorial Production Index and Aggregate Output
199
5 CONCLUSION AND POLICY IMPLICATIONS 218
5.1. Discussion and Conclusion 2185.1.1 Financial Development and Output Fluctuations 2195.1.2 Financial Development, Foreign Currency Borrowing and
Exports 220
5.1.3 External Finance Premium and Output Growth 2225.2. Policy Implications 224
5.2.1 Monetary Policy, Financial Development and Output Fluctuations
224
5.2.2 Foreign Debt Management 2265.2.3 Choice of Exchange Rate Regime Under Imperfect Credit
Markets 227
5.2.4 Credit Effects and Macroeconomic Policies 229 REFERENCES 232APPENDICES 244BIODATA OF THE AUTHOR 277
xiii
LIST OF TABLES
Table Page 1-1 Gross flow of financial liabilities of non-financial corporate
sector (in percentage)
15
1-2 Estimated total NPLs (in percentage of all loans)
16
3-1 Reduced-form coefficients
124
3-2 Pedroni panel cointegration statistics
140
4-1a Panel unit root tests
161
4-1b Panel cointegration test results (Direct relationship between financial development and output fluctuations)
162
4-1c Panel cointegration test results (Indirect relationship between financial intermediary development and output fluctuations)
165
4-1d Group-mean FMOLS estimates of the indirect effect of financial intermediary development on output fluctuations
169
4-1e Individual DOLS estimates of the indirect effect of financial intermediary development on output fluctuations via the propagation of real shocks
174
4-1f Individual DOLS estimates of the indirect effect of financial intermediary development on output fluctuations via the propagation of monetary shocks
175
4-2a Panel unit root tests
183
4-2b Pedroni’s heterogeneous panel cointegration test results (Aggregate relationship between exports, foreign liability and financial development)
185
4-2c Pedroni’s heterogeneous panel cointegration test results (Segmented relationship between exports and foreign liability or financial development)
186
4-2d FMOLS and DOLS estimates of export, foreign liability, financial development and the amplification effects
194
xiv
4-2e DOLS estimates of export, foreign currency borrowing and financial development for ASEAN-5
198
4-3a Pedroni’s heterogeneous panel cointegration test results (Sectorial effects)
205
4-3b Pedroni’s heterogeneous panel cointegration test results (Aggregate effects)
206
4-3c Westerlund’s panel cointegration test results (Sectorial effects)
207
4-3d Westerlund’s panel cointegration test results (Aggregate effects)
208
4-3e FMOLS and DOLS estimates of the impact of external finance premium on sectorial production growth
214
4-3f FMOLS and DOLS estimates of the impacts of external finance premium on aggregate output growth
216
xv
LIST OF FIGURES
Figure Page 1-1 Changes in external finance premium and GDP growth
11
1-2 Changes in external finance premium and the ratio of gross fixed capital formation to stock indexes
14
1-3 Evolution of intervention rates
17
1-4 Changes in external finance premium and domestic credit
19
1-5 Evolution of exchange rates
21
1-6 External debt in foreign currency (in US$)
22
1-7 Debt service in foreign currency (% of GNP)
23
1-8 Monthly East Asian exports
24
1-9 Credit boom-bust cycle
29
2-1 Balance sheet channel
85
2-2 Bank lending channel
88
2-3 Adverse consequences of increases in interest rates 89
xvi
xvii
LIST OF ABBREVIATIONS/ NOTATIONS/ GLOSSARY OF TERMS
ADF Augmented Dickey-Fuller
DGP Data Generating Process
DOLS Between-dimension Dynamic OLS
FD Financial intermediary development
FMOLS Between-dimension Fully Modified OLS
GMM Generalized Method of Moment
H-P filter Hodrick-Prescott filter
IFS International Financial Statistics
IPS Im, Pesaran and Shin
IV Instrumental Variable
PP Phillips-Perron
PZ Parametric Statistic
SPR External Finance Premium (Interest Rate Spread)
SZ Semi-parametric Statistic
TFP Total Factor Productivity
VRG Group-Mean Ratio Statistic
VRP Panel-Variance Ratio Statistic
WBES World Business Environment Survey
WDI World Development Indicators
CHAPTER 1
INTRODUCTION
1.1. Background
Standard macroeconomic models typically assume that credit markets are perfect. In
recent years, however, a body of theoretical work has challenged the key
assumptions required for perfect credit markets. 1 The current work on the
mechanics of credit market imperfections suggests that output and trade are
interrelated with private credit and foreign debt. The financial crisis in East Asia has
rekindled economists’ interest in the reasons and consequences of intervention in
the financial markets. A lesson seems to have emerged from the issue of financial
crisis, the role of financial intermediaries, bank failures and balance of payment
problems. It seems that holding of excessive foreign currency liabilities by firms
and banks have played havoc in East Asia. The external debt that many Asian
countries accumulated to finance their development was almost strictly denominated
in foreign currencies which are external to the region. 2 Besides, the crisis has
highlighted the role financial development in propagating negative shocks to the
economy. This is naturally led to an interest in the determinants of these frictions
and their effects on the macroeconomy, particularly on output fluctuations and
export. In light of that, credit market imperfections that based on asymmetric
information, agency costs and other credit frictions in financial markets, is one of
the theories that has been advanced in an attempt to provide a plausible explanation
for the propagation of cyclical fluctuations.
1 See Bernanke (1983), Bernanke and Gertler (1989) and Bernanke et al. (1998). 2 See Bordo and Meissner (2006) for the role of foreign currency debt in financial crises.
Over the last two decades, East Asian economies have experienced accelerate
financial development, periods of rapid credit expansion, associated with high level
foreign borrowing and rapid economic growth.3 Concerns have been raised on the
role of excessive credit growth in the previous financial crises in Asian markets.
These problems are associated with low investment, sharp increases in insolvencies
and bankruptcies, rising debt burdens, collapsing equity prices, bank failures, high
rate of defaults and output contraction. The third generation crises models have
considered credit market imperfections as key fundamentals. According to this
view, deteriorating credit market conditions are not simply passive reflections of a
declining real economy, but are in themselves a major factor depressing economic
activity. The key elements described above are based on borrowers’ credit
worthiness, supply of loans by commercial banks, unwarranted non-performing
loans and companies with excessive foreign currency-denominated debt. These
factors are among the most important elements in explaining both the credit and
output fluctuations in the region. This third generation model is particularly well
suited to analyze the case of economies like in East Asia, where the source of
currency crises lied primarily in the deteriorating balance sheets of private domestic
firms and commercial banks rather than in uncontrolled budget deficit policies by
local governments (e.g., see Mishkin, 1999).
3 The main stylized facts on credit expansion and output cycles are described in Schneider and Tornell (2004).
2
The idea that credit market imperfections play a central role in the propagation of
cyclical fluctuations has a long-standing tradition in macroeconomics. Since Irving
Fisher’s debt-deflation theory of Great Depression, many economists have argued
that deteriorating credit market conditions are in themselves a major factor
depressing real economic activity. Beginning with Bernanke and Gertler (1989) and
Kiyotaki and Moore (1997) balance sheet effects were the initial efforts to introduce
such effects into mainstream economic models in a formal way. In particular,
endogenous developments in credit markets may work to propagate and amplify
shocks to the economy (Bernanke and Gertler, 1995). More recently, Beck et al.
(2006) has developed a theoretical model to assess the dampening effect of real
shocks and magnifying effect of monetary shocks on output fluctuations.
Under credit market imperfections, output relates to the net effect of the procyclical
movements in borrowers’ net worth (i.e. balance sheet effects) and countercyclical
movements in the external finance premium (i.e. the difference between the cost of
funds raised externally and the opportunity cost of funds generated internally). Such
a mechanism tends to constrain profitable investment opportunities and to produce
inefficient decline in output. Within this context, balance sheets of some economic
agents are highly vulnerable to adverse demand shocks because of the liabilities
accumulated during the credit boom periods. These balance sheet exposures can be
the sources of amplification and propagation during the downturn. One can define
that the degree of credit market imperfections are depending on the magnitudes of
these balance sheets exposures to negative aggregate shocks.
3
The traditional “credit channel” literature examines the impact of asymmetric
information via the changes in agency costs on real spending and economic activity.
Literature of credit channel is divided into two schools of thought, balance sheet and
bank lending channels. The bank credit channel analyses the impact of shocks on
the supply of loans by depository institutions, whereas the balance sheet channel
focuses on the potential impact of shocks on firms’ balance sheets and their ability
to borrow. Both channels emphasize on the asymmetric information between the
borrowers and lenders which alter the costs of financing that have significant
consequences on output fluctuations. Although both channels theoretically quite
different, we do not intend to distinguish them empirically.
Nevertheless, both channels are based on one key fundamental, the “financial
accelerator”. 4 The financial accelerator hypothesis says that credit market
distortions magnify economic fluctuation. Accordingly, small credit distortions may
lead large and persistent fluctuation in output. In other words, credit market
distortions create a financial accelerator which destabilizes the economy. While in
some cases the distortions destabilize the economy, they sometimes stabilize the
economy. 5 Many empirical studies are unable to distinguish between financial
accelerator and stabilizer. In order to fill the gap in the literature, this study attempts
to distinguish them empirically by considering various macroeconomic shocks.
4 The term “financial accelerator” was first introduced by Bernanke and Gertler (1989). 5 See a recent study by House (2006) where the stabilizing forces are closely related to forces that cause overinvestment in static models.
4
In a world of imperfect credit market, financial intermediaries are important because
of information and transactions costs that arise from imperfect information between
the borrowers and lenders. This information asymmetry is opening up the possibility
of an interesting interaction between financial intermediary development and output
fluctuations. As a result, questions have been raised on the dampening and
amplifying effect of financial development on output fluctuations. Numerous studies
have focused on financial development and economic growth (e.g. Rajan and
Zingales, 1998; Levine et al., 2000; Beck et al., 2000b),6 however, the indirect
effect of financial development on output fluctuations has not been studied
thoroughly yet. 7 This study examines on both the direct and indirect effects of
financial intermediary development on output fluctuations.
The credit market imperfections can also affect the way in which an economy reacts
to exchange rate movements through different channels. For example, after the large
exchange rate depreciations following the 1997 East Asian crisis, export volumes
from East Asian countries did not increase with respect to the large currency
depreciations.8 Two main explanations for this phenomenon have been proposed,
excessive foreign currency borrowing affected firms’ balance sheets and contraction
in domestic credit affected supply of exports.
6 Rajan and Zingales (1998) argue that financial development facilitates economic growth as it reduces external costs of finance to firms. 7 See a latest study by Beck et al. (2006). 8 See Duttagupta and Spilimbergo (2004) for a survey of Asian exports during the crisis.
5
The first channel related to this view is foreign currency borrowings where share of
firms’ liability is denominated in foreign currency, thus exchange rate depreciation
will increase the amount of this debt. This will deteriorate firms’ balance sheets and
thus decrease the amount of their production.9 The second channel that can be
observed is the presence of credit constraints where depreciation can decrease the
amount of firms’ cash flow if their assets are denominated in domestic currency; if
this cash flow determines firms’ net worth, investment will decrease after
depreciation and if this investment is necessary to produce and export, trade will
decrease too. The complementary of these two channels is called the “currency
mismatch”. The effects would be the same if countries have large debt denominated
in foreign currency to finance their development while the cash flow that serve
those debts are denominated in domestic currency, a depreciation of currency
exacerbating debt-service difficulties and increasing the likelihood of default of
domestic banks and firms and consequently economic collapsed.
This view is argued by Eichengreen and Hausmann (1999) that the danger of
exchange rate fluctuations in the face of foreign currency borrowing might force
many countries to adopt hard currency pegs. They coined the term “original sin”
because they argued foreign currency denominated debt was imposed by
international capital markets. Nations with poor reputations, and even nations with
ostensibly good reputations or solid fundamentals, are obliged to issue debt in key
international currencies. In other words, domestic policies or problems were not the
only reason countries could not borrow in their own currencies. 9 See for example, Deardorff (2000), Jeanne (2002) and Cespedes et al. (2004).
6
This study considers three literatures of credit market imperfections – credit channel
(or the role of financial intermediaries), financial accelerator and currency mismatch
focusing on the selected countries in East Asian and Pacific region. In particular,
this study is related to four different stands of literature. First, this study is based on
a large empirical literature on the relationship between financial development and
output fluctuations. A second relevant stand of literature is the accelerating effects
of credit market imperfections on the propagation of various economic shocks. A
third related literature is the effect of exchange rate movements on export when
foreign currency borrowing and the level of credit constraint are considered. A
fourth related line of work is the literature on the credit channel of monetary
transmission mechanism where monetary policy impacts on real economy through
the balance sheet and bank lending channels.
In the following sections, a descriptive analysis of how credit market imperfections
at work with respect to the changes in various financial market indicators is
reviewed. Such indicators are the role of credit constraints in output fluctuations,
the importance of bank loans for bank-dependent borrowers, the balance sheet
effects with or without the foreign currency denominated debt and the rapid
expansions of guaranteed debt by the public entities. Based on the descriptive
analysis, three hypotheses are proposed in which will be examined in the later parts
of this study.
7