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The Effects of Exchange Rate and Interest Rate Shocks on Bank Lending in Indonesia

Author

Listed:
  • Iwan J. Azis

    (Lecturer, Cornell University, Ithaca, NY 14853)

  • Willem Thorbecke

    (Lecturer, Department of Economics, George Mason University, Fairfax, VA, 22030)

Abstract

Krugman used the Bernanke-Gertler model to explain the Asian Crisis. This model implies that macroeconomic shocks can decrease credit creation by reducing firms’ creditworthiness or by eroding bank capital. Foreign banks in Indonesia should be less likely to restrict credit following macroeconomic shocks than domestic banks because they employed better risk management practices, they were less vulnerable to disintermediation, and their customers were largely hedged. Thus foreign banks were used as the control group. We found that interest and exchange rate shocks reduced bank capital and bank lending more greatly in domestic banks than in foreign banks. This indicates that the crisis curtailed the loan supply in Indonesia, forcing firms to reduce spending and output.

Suggested Citation

  • Iwan J. Azis & Willem Thorbecke, 2004. "The Effects of Exchange Rate and Interest Rate Shocks on Bank Lending in Indonesia," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 52, pages 279-295, December.
    • Handle: RePEc:lpe:efijnl:200414
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    Citations

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    Cited by:

    1. Takatoshi Ito & Kiyotaka Sato, 2008. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: Vector Autoregression Analysis of the Exchange Rate Pass-Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1407-1438, October.
    2. Takatoshi Ito & Kiyotaka Sato, 2006. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through," CIRJE F-Series CIRJE-F-406, CIRJE, Faculty of Economics, University of Tokyo.
    3. Khan, Haider, 2013. "Basel III, BIS and Global Financial Governance," MPRA Paper 49513, University Library of Munich, Germany.
    4. Willem Thorbecke, 2024. "Macroeconomic Shocks and Economic Performance in Malaysia: A Sectoral Analysis," JRFM, MDPI, vol. 17(3), pages 1-19, March.
    5. Khan, Haider, 2013. "Global Financial Governance: Towards a New Global Financial Architecture for Averting Deep Financial Crises," MPRA Paper 49275, University Library of Munich, Germany.
    6. Willem Thorbecke, 2021. "The weak rupiah: catching the tailwinds and avoiding the shoals," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 23(3), pages 521-539, December.
    7. Khan, Haider, 2011. "Constructing Global Governance of Global Finance: Towards a Hybrid Global Financial Architecture," MPRA Paper 40249, University Library of Munich, Germany, revised Jan 2012.
    8. Khan, Haider, 2013. "Deep Financial Crises, Reforming the IMF and Building Regional Autonomy:Towards a New Hybrid Global Financial Architecture," MPRA Paper 49514, University Library of Munich, Germany.

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