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A Model Of Self‐Fulfilling Financial Crises

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  • YONG JIN KIM
  • JONG‐WHA LEE

Abstract

This paper combines the structural weakness and the self‐fulfilling panic view to explain the cause of the East Asian crises. In this model economy, the diversification strategies induce conglomerate firms to overinvest. They accumulate losses due to their unprofitable sectors and then compensate by obtaining bank loans. Domestic banks, which borrow from foreign banks, lend money as long as the total amount of accumulated loans remains within the firms’ collateral value. The model shows that if the debt to collateral value ratio belongs to a certain range a self‐fulfilling crisis can occur due to the self‐fulfilling expectations of foreign investors.

Suggested Citation

  • Yong Jin Kim & Jong‐Wha Lee, 2006. "A Model Of Self‐Fulfilling Financial Crises," The Japanese Economic Review, Japanese Economic Association, vol. 57(1), pages 87-100, March.
    • Handle: RePEc:bla:jecrev:v:57:y:2006:i:1:p:87-100
    DOI: 10.1111/j.1468-5876.2006.00313.x
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    References listed on IDEAS

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    1. Mr. Eduardo Borensztein & Jong-Wha Lee, 1999. "Credit Allocation and Financial Crisis in Korea," IMF Working Papers 1999/020, International Monetary Fund.
    2. David S. Scharfstein, 1998. "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates," NBER Working Papers 6352, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sung Jin Kang & Yasuyuki Sawada, 2008. "Credit Crunch And Household Welfare, The Case Of The Korean Financial Crisis," The Japanese Economic Review, Japanese Economic Association, vol. 59(4), pages 438-458, December.
    2. Marian Rizov, 2008. "Corporate Capital Structure And How Soft Budget Constraints May Affect It," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 648-684, September.
    3. Yong Jin Kim & Chul‐In Lee, 2019. "Sovereign Debt Crisis In A Monetary Union: Accounting For Excessive Debt, Housing Bubbles, And The Transmission Of Crises," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1098-1119, April.

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