The Asian Financial Crisis

Corsetti, Pesenti, and Roubini (1999) document the causes of the Asian financial crisis. In their study, there are three key concepts that

characterize the eve of the financial crisis: overlending, current account imbalances, and the maturity structure of capital inflows. According

to their study, the fragile banking and financial systems in Asian countries led to overlending booms in these countries prior to the financial

crisis. For example, in Thailand, although government regulation limited the credit provision of traditional commercial banks, unregulated

nonbank financial intermediaries, which had emerged after the financial liberalization of the 1990s, circumvented credit limits. Furthermore,

a tax deduction incentivized these nonbank financial intermediaries to commit to offshore borrowing. As a result, these intermediaries substantially expanded their lending to the real estate sector, primarily financed by offshore borrowing. Massive capital inflows in Asian countries due to the large expansion of offshore borrowing induced large current account deficits. Under these circumstances, there was a double misalignment problem in these countries in which unproductive domestic long-term investment projects were financed by short-term borrowing with a foreign currency. Foreign lenders with short lending maturity anticipated the failure of unproductive investment projects and the insolvency of these countries and therefore refused to renew lending, causing the Asian financial crisis. Given the numerous capital inflows and overlending to these countries, one might raise a natural question: did borrowers in Asian countries really face collateral constraints? Although we investigate this question in this article using macroeconomic data, there are some pieces of microeconomic evidence indicating that borrowers faced collateral constraints before the financial crisis. Using banking data covering the period 1992—1996, Menkhoff, Neuberger, and Suwanaporn (2006) provide evidence showing that collateral-based lending is prevalent in Thailand. Similarly, using firm level data, Charumilind, Kali, and Wiwattanakantang (2006) reveal that not only relationship lending but also collateral-based lending were present in

long-term loan contracts in Thailand before the Asian financial crisis. Moreover, Driffield and Pal (2001) investigate firm level data during

the 1989—1997 period for Indonesia, Korea, Malaysia, and Thailand and find evidence suggesting that smaller firms in these countries were

credit constrained. Although using microeconomic data, as done in these studies, appears to be suitable for addressing whether the private

sector suffers from collateral constraints, we would incur a great cost if we examined many countries using microeconomic data for each

and it appears to be impossible to investigate the effect of collateral constraints on the current account dynamics using microeconomic data.

Given this situation, our simple macroeconomic estimation merits application to examine whether an economy faces collateral constraints, and it complements the microeconomic estimations performed by the aforementioned studies.

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