Discussion Papers In Economics
And Business

Monetary Transmissions Immediately after the Crisis
in East Asia
Masahiro ENYA and Akira KOHSAKA

Discussion Paper 04-05

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANMonetary Transmissions Immediately after the Crisis
in East Asia
Masahiro ENYA and Akira KOHSAKA

Discussion Paper 04-05

March 2004

この研究は財団法人学術振興野村基金研究プロジェクト「金融危機と東アジアの金融政策波及メカニズム」の成果の一部である。

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANMonetary Transmissions Immediately after the Crisis
in East Asia

Masahiro ENYA* and Akira KOHSAKA**

February 2004

Abstract
We examine dynamic patterns of macroeconomic variables in East Asia immediately after the
Asian financial crisis. Particularly, focusing on East Asia, we can identify their distinctive
features from those of aggregate cross-country results. Also, we check with the financial crises
in East Asia in the 1980s in order to make sure to what extent the contrast between the aggregate
cross-country results and that of the Asian financial crisis comes from differences in time(external environment) or in country structure or both. Some distinctive features in East Asia
include higher real interest rates in the crisis year, persistent output as well as investment
slowdown, and different behaviors of trade and fiscal surpluses after the crisis. The results
suggest that initial monetary tightening be responsible for the unexpectedly serious recession andthat favorable external conditions and fiscal stimulus did contribute to the post-crisis real
recovery even without credit recoveries.
JEL Classification: E5, O11, O53
Key words: macroeconomic dynamics, East Asia, financial crisis*

Lecturer, Faculty of Politics, Economics and Law Osaka International University (E-mail: enya@pel.oiu.ac.jp)**

Author to be contacted.

Professor, Osaka School of International Public Policy, Osaka University, 1-31

Machikaneyama-cho, Toyonaka, Osaka, 560-0043, Japan. E-mail: kohsaka@osipp.osaka-u.ac.jp.

I. Introduction
There would be no doubt that the Asian financial crisis in 1997 was one of the mostdramatic economic events in the last decade.

The crisis surprised most of concerned observers

and prompted them to reexamine their beliefs on stable macroeconomic management in theregion.

Not only this, however, the persistent and even intensifying crises immediately after the

initial policy responses under the IMF-supported adjustment programs did lead us to thedesperate need to reexamine these programs.

Focusing on the overall strategy of crisis

management for the Asian financial crisis, Boorman et al. [2000] denote that “financial sector
vulnerability was at the root of the Asian crisis.”
It appears that the vulnerability of financial sectors in East Asia was suddenly
highlighted after the Asian financial crisis in 1997.

But are they really uniquely vulnerable?

It has been recognized that financial institutions and systems have got into trouble world wide
including developing as well as developed countries, along with the financial globalization (IMF[1999], Kohsaka [2000]), failing to adapt to the new financial environment (see Caprio andKlingebiel [1997], for example.).

In this context, even the highlighted vulnerability can be

regarded as one of universal adaptation failures to the financial globalization.

With higheconomic growth and huge capital inflows under virtually pegged exchange rates, typicalsyndromes of the adaptation failures were brought about such as asset price boom-and-bust,excess investment and supply, and accumulation of short-term foreign debt unhedged against
exchange rate risks.1
Adjustments and structural reforms have been linked to constitute columns of the IMF
prescription for developing economies in crisis.

The linkage of these two measurements,

however, has been sometimes criticized because overall structural reform plans, which in somecases had appeared to be unrealistically severe, may erode the confidence on the effectiveness ofthe prescription.

Likewise, too harsh tightening macroeconomic policy could erode the basic

confidence on the adjustment policies, thereby leading to a free fall of exchange rates.

More

concretely, at the apparent cost of deflationary impacts, excessive high-interest rate policies may
not contribute to exchange rate stability (Furman and Stiglitz [1998]).
In this paper, we will examine the dynamic patterns of macroeconomic and financial
variables in East Asia immediately after the Asian financial crisis in 1997 from the perspectiveof international comparison.
real economies?

Did changes in money and credits impose deflationary impact on

If so, to what extent?

And how different are they in comparison with

developed and other developing economies?

1

Boorman et al. [2000] name these two symptoms as two types of vulnerability, and claim that they helped set the stage for thecrisis.

-2-

Using cross-country data covering more than 35 developed as well as developing
countries, Demirguc-Kunt and Gupta [2000] examined the behaviors of monetary variables suchas money, credits and interest rates, and real variables such as output and investment, after
financial crises over the period of 1980 to 1995.

We focus, instead, on five East Asian

countries seriously hit by the Asian financial crisis in 1997, i.e. Indonesia, Korea, Malaysia,
Philippines, and Thailand.

This focus, we think, has a few merits.

First, aggregate, or wide-

ranged cross-country studies over different periods could not separate country effects from thoseof exogenous shocks across periods. Second, the aggregate cross-country results over the years
from 1980 to 1995 of Demirguc-Kunt and Gupta [2000] may not be able to identify out thecharacteristics of the 1990s when financial globalization was accelerated significantly.

In these

respects, the focus on the five crisis-hit economies would enable us to presume common external
shocks in the same period of the late 1990s, and relatively homogeneous economies in the same
region.

Thus, we may be able to obtain more representative patterns of dynamic adjustments

then and there significantly different from the aggregate cross-country results.
The structure of this paper is as follows.

After a brief literature survey on the related

issues, Section II introduces an analytical framework and some stylized results on
macroeconomic dynamics in financial crises across countries, drawing on Demirguc-Kunt andGupta [2000].

In Section III, we examine 5 East Asian countries in the Asian financial crisis in

the same framework, and compare the results with the aggregate cross-country case.

We comeup with some distinctive features in East Asia, which include higher real interest rates, persistent
output as well as investment slowdown, and different behaviors of trade and fiscal surpluses.
We, then, check with the financial crises in East Asia in the 1980s in a similar way in Section IV,
in order to make sure to what extent the contrast between the aggregate cross-country results andthat of the Asian financial crisis comes from difference in time (external environment) or incountry (structure) or both.

Thus, we will be able to identify some really unique features ofmacroeconomic dynamics in East Asia in the Asian financial crisis and to draw some
implications on macroeconomic management after the crisis.

Some policy arguments areextended as concluding remarks in Section V.
II. Financial Crises and Macroeconomic Dynamics
Let us begin by touching on a few prior studies along with the similar concerns very
briefly.

Radelet and Sachs [1998] and Furman and Stiglitz [1999] are two of the well-known

studies critical against the IMF prescriptions of conventional monetary tightening as well as
structural reforms, because they might devastate not only the real economy but people’s
confidence on prompt economic recovery.
Admitting underestimation by IMF of the severity of initial economic downturns after-3-

the crisis, Boorman et al. [2000] tried to answer three questions on monetary policy managementin East Asia.

How tight were monetary policies?

tightening counterproductive?

Was there a credit crunch?

Was monetary

Their conclusions are that the degree of monetary tightening was

not extraordinary as compared to prior cases, that there was no evidence for credit crunch, andthat, considering the basic trade-off between exchange rate stability and economic recovery,
alternative policy options were hard to find.
Investigating the post-currency-crisis patterns of recovery and sustainable growth, Parkand Lee [2001] find as a stylized pattern a quick recovery of output growth and significant
contributions of IMF-supported adjustment programs to this recovery process across 160
currency crisis episodes over the years from 1970 to 1995.

Furthermore, they claim that

adjustments in East Asia after the Asian currency crisis fit the stylized cross-country patterns,
although the degrees of initial contraction and following recovery were far larger.
Now, we would like to examine carefully the macroeconomic dynamics in East Asia
immediately after the Asian financial crisis in the context of both international and historicalcomparisons.
1. An Analytical Framework
Demirguc-Kunt and Gupta [2000] examine changes in macroeconomic variables in 35
countries during 36 banking crises.2 3 They are concerned with which variables are affected
more than the others by the crises, and how they behave after the crises.
rather simple.

The basic idea is

They test whether concerned variables are significantly different from theiraverage levels before the crises.

To do so, they regress concerned variables on dummy

variables of the crisis year and the post-crisis years.

Namely, the estimated model is as follows:y it = α + ∑t =T β t DTt + ∑i =1 γ i DC i + u it
T +KN

where y it : macroeconomic variable of country i (=1,2,…,N) in period t (= T-K, T-K+1, …, T,
T+1, …, T+K), DTt : a dummy variable of period t (= T, T+1, …, T+K),

DCi: a dummy

variable of country i, u it : an error term, β t : a coefficient of a dummy variable of period t, γ i : acoefficient of a dummy variable of country i.
2Then, the estimates of β t shows to what extent

The identified banking crises are Argentina (1995), Bolivia (1995), Colombia (1982), Chile (1980), Ecuador (1995), El
Salvador (1989), Finland (1991), Guyana (1993), Indonesia (1992), India (1991), Israel (1983), Italy (1990), Jordan (1989), Japan(1992), Kenya (1993), Mali (1987), Malaysia (1985), Mexico (1982, 1994), Nigeria (1991), Norway (1987), Nepal (1988),
Panama (1988), Papua New Guinea (1989), Paraguay (1995), Peru (1993), Philippines (1981), Portugal (1986), Sri Lanka (1989),
South Africa (1985), Sweden (1990), Thailand (1983), Turkey (1991), United States (1981), Uruguay (1981) and Venezuela(1993).
3
A “banking crisis” is defined as a period in which significant segments of the banking system become illiquid or insolvent(Kaminsky and Reinhalt [1999]). Large scale bank failures, enactment of emergency measures by the government (deposit
freezes, nationalizations, deposit guarantees, bank recapitalization plans), reports of significant depositor runs, the level ofnonperforming loans and the costs of the bailout are among the evidences for a banking crisis.

-4-the levels of the dependent variables in period t deviates from its K-year period average before
the crisis as well as their dynamic pattern of changes after the crisis.

Note, also, that country-

specific effects are picked up with country dummies and that heteroskedasticity-consistent
standard errors are used for hypothesis testing because of country-heterogeneity.
Coefficient estimates ( β t ) of period dummies for each macroeconomic variable ofconcern are quoted to be shown in Table 1.

Assuming K = 3, they show to what extent eachmacroeconomic variable deviates from its average level of the three years before the crisis.
Denoting T as the crisis year, we are concerned with dynamic behaviors of macroeconomic
variables over the period of years from T to T+3.
>>Table 1: Macroeconomic Dynamics after the Financial Crises: Cross-Country Data, 1980-95

2. Cross-Country Observations
The results obtained from this framework using cross-country data can be summarized
as follows.
First, as to output and prices, output growth significantly declines in the crisis year andthe next year, but recovers to the pre-crisis level thereafter.

Inflation rates increase in the crisis

year, and persist thereafter until the third year, significantly.

Significant depreciations of

nominal exchange rates take place and continue in and after the crisis.
Second, as to interest rates, real levels of policy interest rates such as short-term
government bills do not significantly rise in and after the year of the crisis.

This is also the casewith real deposit interest rates. Meanwhile, real loan rates and spreads between loan anddeposit rates increase significantly in the year of the crisis.

Moreover, the spreads significantly

remain higher than its pre-crisis levels until the third year from the crisis.
Third, as to bank deposits and credits, a growth of real demand deposits significantly
falls in the year of the crisis, while a demand deposit ratio to GDP does not change significantly.
Meanwhile, real total deposits (which include demand, term, saving and foreign currency
deposits) are significantly larger than those in the pre-crisis years.
4

output do significantly increase in and after the crisis year.
real bank credit growth persist significantly.

Consequently, their ratios toAfter the crisis, large declines inAt the same time, however, a credit to GDP ratio

significantly increases rather than decreases, because, apparently, a decline in GDP growth islarger than that of credits.
Finally, as to investment and policy variables, an investment to GDP ratio declines fromthe pre-crisis years, but significantly so only in the next year to the crisis.

Fiscal deficits(negative surplus) do not significantly increase, and central bank loans as a ratio to bank assets
4

These situations could coexist with partial bank runs within the banking system and with short-lived runs within a year.

-5-do not significantly increase after the crisis (not reported here).

These facts suggest that fiscal

and monetary measures are not significantly stimulating to the aggregate demand after the crisis.
3. Implications
These observed results can be summarized as follows:
We do not witness system-wise bank runs in the contemporaneous financial crises
unlike in the Great Depression.

This, however, does not contradict a large scale deposit

transfers among banks (Domac and Ferri [1999]).

Probable reasons would be that bank defaults

are not system-wide and/or that depositors presume deposits as virtually insured by governmentseven without formal deposit insurance.
Even though the financial crises bring forth persistent disruptions in the financial sector,
their impacts on the real economy are relatively short-lived.

Alternatively, slowdowns of

output and investment might not be due to the financial crises, but to the negative shocks, whichlead to the crisis. In fact, even when output growth recovers, credit growth remains low.

Inother words, the recovery of output after the crises is realized without that of credit growth.
If this is the case, the credit crunch hypothesis that the recovery of credit growth isindispensable for the output recovery may lose its rationale.

As a matter of fact, withmacroeconomic prospects improving, firms can economize bank credits and switch them toalternative sources such as suppliers’ credits, self-finance, foreign credit lines, equity- and bondissuances.

This is said to be what happened in Mexico (Krueger and Tornell [1999]).

III. The Asian Financial Crisis in 1997
In this section, using the same analytical framework as in Demirguc-Kunt and Gupta[2000], we will examine deviations of relevant macroeconomic variables in and after the Asianfinancial crisis from their pre-crisis trends in East Asia, i.e. Indonesia, Korea, Malaysia, thePhilippines and Thailand.

The variables we focus are: output, prices, interest rates, deposits,loans, expenditures, and policy variables such as government consumption, budget balance, andcentral bank credits.

The estimated result is reported in Table 2.

>>Table 2: Macroeconomic Dynamics after the Financial Crises: East Asia, 1997

1. Observations
Focusing on the differences from the results in Table 1, we will characterize thedynamic pattern of changes in these macroeconomic variables.
Output: A decline in output growth is statistically significant in the year of the crisis andpersists until the third year of the post-crisis period.

In the 1997 Asian crisis, the downward

deviation of the output growth persists significantly longer than the cross-country result.
-6-Prices: As to the differences from the cross-country pattern, two points are notable, i.e.
we do not see significant increases in inflation, nor persistent exchange rate depreciation.

We5

do not see significant increases in inflation either in the crisis-year nor the next year, which iscontrasting to the cross-country pattern of significantly persistent inflation hikes throughout the
post-crisis years.

Furthermore, we detect even a deflationary impact in the second year after thecrisis in East Asia.

Meanwhile, exchange rate depreciation is significant only until the nextyear, which is relatively short-lived.
Interest rates: There is a bulk of debate on the effectiveness of high-interest-rate policy
on macroeconomic stabilization after the Asian crisis (See Furman and Stiglitz [1998], WorldBank [2000], and Lahny and Ghosh [2001], for example.).

In fact, all three real interest rates

for short-term asset, deposit and loan rise significantly in the crisis year by as large as 2 to 5 %,which is apparently different from the cross-country pattern, where only loan rates significantly
rise in the crisis year.

Note that there appears no expansion of loan-deposit interest spreads in

the Asian financial crisis unlike in the cross-country data, where they persist significantly over
the three post-crisis years.
Deposits: The dynamic patterns of bank deposits are roughly similar to the crosscountry ones.

In fact, demand deposits decline in real growth in the first year after the crisis,but not so with respect to ratios to GDP, though we see one year lag in this response compared tothe cross-country case.

Also, the growth rates of real total deposits significantly decline, but

their ratios to GDP rise and persist during the post-crisis years.
Credits: The behavior of bank credits, too, looks fairly similar to the cross-country
results.

A decline of its real growth rates is significant, and persistent until the second year

from the crisis, with one-year lag, though.

Their ratios to GDP increase significantly from thepre-crisis levels, but the deviations gradually reduce in the three post-crisis years.

Note,however, the growth rates of loans significantly increase instead of decrease in the very crisis
year.

This is not found in the cross-country results and may be due to good money after bad

thrown in immediately after the crisis.
Expenditures: Among aggregate demand components, most conspicuous is thepersistently lowered investment ratios to GDP, which are contrasting to the cross-country case.
These significantly lowered investment ratios continue until the third year after the crisis.
Meanwhile, the decrease in private consumption growth is short-lived only in one year after thecrisis (not reported in Table 2).

This is consistent with significantly persistent increases in trade

surplus to GDP ratios, which straightforwardly reflect the severity of the declines in domestic
absorption led by the stagnated investment demand.
5

Fact is that inflation increases barely insignificantly in the first year after the crisis.

-7-

Policy variables: Fiscal and monetary policy responses to the crisis are reflected on
fiscal balances and central bank loans.

Increases (decreases) in fiscal deficits (surplus) aresignificant and persistent throughout the post-crisis period, which is totally different from thecross-country pattern.

This suggests that fiscal stimulus is resorted to in the post-crisis

management in the Asian crisis.

Meanwhile, central bank loans to the banking sector increasesignificantly in the crisis year (which is not significant in the cross-country case), which implies
that the monetary authorities play the very role of the lender of last resort.
2. Implications
From the above observations, we would be able to summarize the characteristics ofmacroeconomic dynamics in the crisis-hit countries in East Asia as compared to the crosscountry results, as follows:
In the 1997 Asian crisis, the slowdown of output growth prolonged significantly (by two
full years) with persistent slowdown of bank credit growth, while domestic inflation did not
significantly flared up after the crisis.

In fact, there was even a symptom of deflation then.

All three real interest rates, i.e. short-term (policy), deposits and loan rates, rose
immediately in the crisis year with loan-deposit interest rate spreads unchanged.

By contrast,

the cross-country data shows no significant increases in short-term as well as deposit rates, but
increases in loan rates and loan-deposit spreads. Thus, this might suggest that the high-interestrate policy in the Asian financial crisis was fairly conspicuous and that banks did not adjust risk
premiums in supplying credits.
We saw no system-wide bank runs also in the Asian financial crisis.

That is, there wasno sign of reductions in total deposits, with the slowdown of their growth rates immediately after
the crisis, but short-lived.

Dynamic patterns of bank credits are also shared in common by thetwo cases, namely persistent slowdown of credit growth after the crisis.
As to the components of aggregate demand, however, we can see large differences
between the two cases.

Among others, persistent slowdown of domestic investment isconspicuous in the Asian financial crisis. Moreover, persistent increases in trade surplus anddecreases in fiscal surplus are two additional conspicuous factors that characterize themacroeconomic dynamics in East Asia.

In other words, while domestic demand slowed down

due to persistently low investment, a combination of the resulting weak import demand,
exogenous export recovery and deliberate fiscal expansion must have supported economic
growth. For reference, actual figures for the above variables are shown in Figure 1.
>>Figure 1. Macroeconomic Dynamics before and after the Asian Financial Crisis-8-IV. Financial Crises in the 1980s in East Asia
So far, we had contrasted the dynamic responses of macroeconomic variables tofinancial crises between the cross-country case over the period from 1980 to 1995 and the East
Asian case in 1997.

The contrast may, however, come from either environmental differences

between the two periods (time effect) or country-specific structural differences between East Asiaand the others (country effect), or both.

Therefore, in order to shed some more lights on thesetwo considerations, we will check the macroeconomic dynamics of financial crises in East Asia
in the 1980s, which is a sub-sample of the cross-country results.

In other words, by looking at

the East Asian case in the 1980s, we will try to pick up the country effect as compared to thecross-country case, and the time effect as compared to the 1997 East Asian case.
The estimated results are shown in Table 3, where five episodes of financial crises infive countries are covered.6>>Table 3: Macroeconomic Dynamics after the Financial Crises, East Asia, 1980s

1. Observations
Output: A decline in output growth appears to persist over three years in and after thecrisis, longer than in the cross-country case.

Prices: The inflationary impact does not show up,

or rather, there is in fact a deflationary impact in the first year after the crisis.
common feature in East Asia through the 1980s and 90s.

This looks aAs for exchange rate depreciation,

which was not endogenous then, we cannot trace it in this case, at least within two years after thecrisis.7

Interest rates: Policy interest rates as well as deposit and loan rates do not appear to

respond to the crisis, while their spreads increase in the first and second years after the crisis.
Deposits: A real growth in demand deposits declines in the crisis year and their ratios to
GDP decline persistently after the crisis, the latter of which cannot be seen in the previous twocases.

Total real deposit growth remains unchanged, but its ratio to GDP increases after thecrisis, which appears common with the other cases. Credits: A real growth in bank credits does
not respond to the crisis in East Asia in the 1980s, while its GDP ratios increases as in theprevious cases.
Expenditures: Investment ratios to GDP decline, but only in the first year after the crisis,
which appears similar to the cross-country case.

Consumption growth rates decline in the crisis

year only, while its GDP ratios decline over the three years after the crisis, which cannot be

6They are Thailand (1983), Malaysia (1985), the Philippines (1981), Indonesia (1992) and Singapore (1982) (Lindgren et al.
[1996]). Since the five countries are not identical to the five in the 1997 Crisis case, it follows that we implicitly assume thatthey are more similar to each other than to the others. Note that omitting Singapore did not change the result in a significant
way.
7
In Table 3, we find significant exchange rate depreciation in the year T+2, although we do not suppose it is a lagged response of
exchange rates to the financial crisis.

-9-

found in the 1997 crisis.

Trade surplus does not appear to respond to the crisis here. Policy

variables: We do not find responses of fiscal surplus to the crisis, as in the cross-country case.
Again, actual figures for the above variables are shown in Figure 2.
>>Figure 2. Macroeconomic Dynamics before and after the Financial Crises, East Asia, the 1980s

2. Summing Up
Now, what do we come up with, comparing these three sets of financial crises cases?
Table 4 summarizes the above features in macroeconomic dynamics after the financial crises forthe exposition purpose.

First, we focus on the similarities in East Asian cases.

features across the two periods are there.

Two common

One is that the negative impact on output growth offinancial crises is more persistent than in the cross-country case.

And, two, interesting is thatthe impact is not significantly inflationary, but somehow deflationary.

This is quite contrasting

to the cross-country case, and would provide one of the reasons why exchange rate depreciation
is more persistent in the cross-country case, but rather short-lived in East Asia.
>>Table 4: Macroeconomic Dynamics after the Financial Crises: Summary

Second, we find three common features shared beyond the time and country effects.
One is an incipient decline of real total deposit growth on the one hand, and a persistent increase
in total deposits to GDP ratios on the other, after the financial crises.
increase in bank credits to GDP ratios after the crises.

Two is also a persistent

From the first feature, we would be able

to say that there seems no bank runs on the banking system as a whole at the financial crises
since the 1980s.

The third feature is the negative impact of the crisis on the investment to GDP

ratios, though the impact looks remarkably more persistent in the 1997 Asian crisis.
Eventually, we are winding up with most conspicuous features of the 1997 Asian crisis.
Apparently, the unique features of the crisis are dynamics in real interest rates, real bank credits,and components of aggregate demand to GDP ratios.

Significantly high interest rate policies in

the crisis year come first as a unique feature of the 1997 crisis.

A persistent slowdown of realbank credit growth is the second unique feature, because this is not the case in the crisis in the
1980s in East Asia.

The third unique feature consists of persistent slowdown of domestic

investment to GDP ratio on the one hand, and of persistent increases of trade surplus andpersistent decreases of fiscal surplus as ratios to GDP on the other. Surely, the latter offset atleast partially the negative effect of the former on economic activity levels.
V. Concluding Remarks
Having identified the most unique features of the macroeconomic dynamics in East Asia
- 10 -

immediately after the Asian financial crisis, we cannot but be inclined for the criticism against
excessively tight monetary policy immediately after the financial crisis in East Asia.

It appears

difficult to claim that the high-interest-rate policy has little to do with persistent slowdowns of
output, bank credits, and domestic investment. These slowdowns must have put a deflationary
instead of inflationary impact.

High interest rates helped deteriorate corporate balance sheets

and lower their creditworthiness, and banks must have resorted to quantitative restrictions in loan
provision. It would be fine with no systemic bank runs on the deposit side any more, which,however, could hardly prevent from credit crunch. Banks seemed to have lost appetite forsupplying credits, which might be reflected on no significant expansion of interest rate spreads.
There seem to be reasons for the credit crunch hypothesis that the shortage of bank credits led to
output and investment slowdown and that the recovery of credits is indispensable for theautonomous recovery of crisis-hit economies.
Now, how tight were monetary policies in the Asian financial crisis?

As a matter offact, the degree of monetary tightening in the Asian financial crisis turned out to be significantly
larger than in the prior crises.

Policy (real) interest rates were significantly higher.

The

slowdown of real credit growth was significant and significantly persistent.
Then, was there a credit crunch?

We would not be able to prove whether credit crunch

took place in East Asia, because it would be generally hard to disentangle among possible causesof persistent slowdowns of credit growth.

We can think of not only monetary tightening, but

strengthened prudential controls, rising risk perceptions, to name a few.

In addition,

intrinsically, aggregate data on credits can tell very little about their shifts among heterogeneous
borrowers.

That we could not prove the existence of credit crunch, however, does notnecessarily mean there was no credit crunch.
Finally, given the vulnerabilities in the financial as well as corporate sectors in East
Asia, was monetary tightening counter-productive?

Whether the high-interest-rate policy leads

to exchange rate depreciation or appreciation in the financial crisis has attracted some interests
among policy makers and academics (Furman and Stiglitz [1999]).

Only if monetary tightening

could prevent from further exchange rate depreciation, it would be able to prevent from further
deterioration of balance sheets of financial as well as corporate sectors.

Note, however, thatmonetary tightening itself affects negatively those balance sheets directly by raising capital costsof the corporate sector and indirectly by making the financial sector more cautious in provisionof credits.

While this exchange rate-interest rate nexus (Basurto and Ghosh [2000]) is related

to the secondary burden on the real sector, monetary tightening definitely does have the primary
negative effect through significantly slower credit growth.

The monetary tightening, in turn,proved to be counterproductive, dampening domestic investment and putting a deflationary
impact on the real economic activity in East Asia. As such, the economic recovery in East Asia
- 11 -

has not been supported by recoveries of domestic investment as well as of bank credits.

As

Park and Lee [2001] correctly pointed out, only fiscal stimulus and external factors such asexport demand growth helped break through the deflationary situations brought about by the
initial policy programs.

- 12 -

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Prospects,” Brookings Papers on Economic Activity, 1:1998.
World Bank [2000], East Asia: Recovery and Beyond, Washington, D.C., 2000.

- 14 -

Table 1. Macroeconomic Dynamics after the Financial Crises: Cross-Country, 1980-1995
OutputPricesInterest rates

Real GDP

Inflation

Exchange Rate

Short-term

Loan

Deposit

GrowthRate

Depreciation(real)(real)(real)

T-3.913 ***1.004

19.166 **6.816

28.714 ***
8.274

5.501
6.768

10.504 **
4.685

1.806
2.036

10.079 **
4.899

T+1

-3.519 ***0.896

27.785 **13.40836.968 **14.415

6.918
11.52521.31217.007

0.827
3.359

22.332
15.696T+2-0.9500.662

23.820 **10.44930.384 ***11.121-7.2398.279

16.24910.043-3.291
3.686

21.01613.483

T+3

0.398
0.829

18.177 ***5.830

23.232 ***6.707-3.078
4.548

3.827
5.685

-4.9034.023

10.906 **4.899

Deposits

Credits

Demand Deposit
GrowthT-5.798 ***
2.019

T+1

SpreadTotal Deposit
Ratio to GDP

GrowthExpenditures

Bank Credit
Ratio to GDP

GrowthRatio to GDP

Investment

Fiscal Surplus

Ratio to GDP

Ratio to GDP

0.286
336.000

2.920 **
1.382

-6.761 ***2.261

6.046 ***
1.705

-0.4280.551-0.4940.594-2.397
1.761

0.333
0.398

5.554 ***
1.881

-7.390 ***2.331

7.849 ***
2.675

-1.067 **0.564-0.8030.512

T+2-3.676
2.814

0.734
0.466

5.177 ***
1.292

-7.178 ***2.199

6.748 ***
2.062

-0.7240.621-0.041
0.713

T+3-4.2802.608

0.878 *
0.509

0.233 ***
1.451

-5.687 **2.334

5.646 **
2.180

-0.854
0.698

0.974
1.015

Source: Demirguc-Kunt and Gupta [2000]
Notes: 1. OLS estimation. Standard errors are adjusted for hetero-scedasticity based on White.
2. Figures are estimated coefficients of period dummies and their standard errores (Italic).
3. *, **, and *** indicate significance levels of 10%, 5%, and 1%, respectively.
4. Explanatory variables are period-dummies for the year of the crisis (=T) and after.

Table 2. Macroeconomic Dynamics after the Financial Crises: East Asia, 1997
OutputPricesInterest rates

Real GDP

Inflation

Exchange Rate

Short-term

Loan

Deposit

GrowthRate

Depreciation(real)(real)(real)

T-0.027 ***0.016-0.0050.638

0.174 ***
0.000

5.194 ***
0.009

2.049 **
0.028

2.082 ***
0.018

-0.033
0.933

T+1-0.146 ***
0.000

0.156
0.121

0.797 ***
0.019

-3.376
0.252-10.845
0.218-9.1640.191-1.6810.353

T+2-0.022 *0.085-0.027 *0.077-0.112
0.140

1.173
0.358

2.630
0.161

2.553
0.131

0.077
0.871

T+3

-0.010 *0.090-0.018
0.224

0.037
0.458

-2.486 ***0.002-0.8100.592-1.430
0.329

0.621
0.477

Adjusted R-square

0.749

0.329

0.424

0.349

0.053

0.090

0.279

Sample size

45

45

45

45

45

45

45

Deposits

Credits

Demand Deposit
GrowthSpreadTotal Deposit
Ratio to GDP

GrowthExpenditures

Bank Credit
Ratio to GDP

GrowthRatio to GDP

Investment

Trade Surplus

Fiscal Surplus

Ratio to GDP

Ratio to GDP

Ratio to GDPT-0.1140.198-0.003
0.515

0.015
0.527

0.110 ***
0.000

0.045 **
0.040

0.237 ***
0.000

-0.011
0.381

0.009
0.437

-0.0070.199

T+1-0.238 **0.046-0.0080.135-0.118 ***0.019

0.171 ***
0.000

-0.310 ***0.000

0.208 ***
0.000

-0.135 ***0.000

0.136 ***
0.000

-0.034 ***
0.000

T+2

0.061
0.122

0.001
0.841

-0.0350.440

0.206 ***
0.000

-0.168 ***0.009

0.171 ***
0.001

-0.146 ***0.000

0.132 ***
0.000

-0.040 ***
0.000

T+3

0.068
0.296

0.005 *
0.097

-0.0490.209

0.220 ***
0.000

-0.066
0.335

0.164 ***
0.002

-0.119 ***0.000

0.117 ***
0.000

-0.041 ***0.000

Adjusted R-squared

0.164

0.957

0.159

0.918

0.468

0.860

0.845

0.746

0.727

45

45

45

45

45

45

45

45

45

Sample size

Notes: 1. OLS estimation. Standard errors are adjusted for hetero-scedasticity based on White [1978].
2. Figures are estimated coefficients of period dummies and their p-values (Italic). The coefficients stand for deviations from the pre-crisis averages.
3. *, **, and *** stand for significance levels of 10%, 5%, and 1%, respectively.
4. Explanatory variables are period-dummies for the year of the crisis (=T) and after.

Table 3. Macroeconomic Dynamics after the Financial Crises: East Asia, 1980s
OutputPricesInterest rates

Real GDP

Inflation

Exchange Rate

Short-term

Loan

Deposit

GrowthRate

Depreciation(real)(real)(real)

SpreadT-0.025 *0.076-0.011
0.493

0.021
0.292

-0.002
0.999

2.097
0.343

2.163
0.229

-0.066
0.927

T+1-0.0170.129-0.051 **
0.038

0.021
0.137

3.122
0.199

5.810 **
0.025

4.582 *
0.097

1.228 **
0.028

T+2

-0.012 **0.037-0.0210.305

0.082 **
0.045

0.314
0.888

1.967
0.399

0.453
0.871

1.514 **
0.018

T+3

-0.038
0.127

0.053
0.434

0.105
0.151

-4.775
0.246-4.4960.332-5.588
0.271

1.092
0.115

T+4

-0.0240.281
0.226-0.002
0.926
0.329

0.020
0.185
0.238

-0.127
0.950
0.163

0.333
0.859
0.301

-0.437
0.753
0.295

0.770
0.519
0.147

45

45

45

45

45

45

45

Adjusted R-square

Sample size

Deposits

Credits

Demand Deposit
GrowthTotal Deposit
Ratio to GDP

GrowthExpenditures

Bank Credit
Ratio to GDP

GrowthRatio to GDP

Investment

Trade Surplus

Fiscal Surplus

Ratio to GDP

Ratio to GDP

Ratio to GDPT-0.186 ***0.002-0.009 ***0.005-0.0560.102

0.056 ***
0.000

-0.0470.230

0.101 ***
0.000

-0.0100.417-0.080
0.175

0.015
0.125

T+1

-0.0150.765-0.010 ***0.000-0.0050.898

0.096 ***
0.000

-0.0250.509

0.158 ***
0.000

-0.026 *0.096-0.177
0.228

0.004
0.632

T+2

-0.0390.564-0.011 ***0.001-0.0290.716

0.102 ***
0.000

-0.0790.206

0.164 ***
0.000

-0.025
0.208

0.113
0.334

0.019 **
0.023

T+3

-0.0820.544-0.013 ***0.003-0.144 **0.041

0.105 ***
0.000

-0.224 ***0.008

0.142 ***
0.000

-0.051 ***0.000-0.1590.253

0.024 **
0.033

T+4

0.051
0.551
0.064

-0.0070.182
0.953-0.0590.157
0.077

0.132 ***
0.000
0.913

-0.147 **
0.017
0.316

0.140 ***
0.001
0.919

-0.065 ***
0.004
0.780

-0.0070.828-0.0340.028 **
0.013
0.702

45

45

45

45

45

45

45

Adjusted R-square

Sample size

45

Notes: 1. OLS estimation. Standard errors are adjusted for hetero-scedasticity based on White [1978].
2. Figures are estimated coefficients of period dummies and their p-values (Italic). The coefficients stand for deviations from the pre-crisis averages.
3. *, **, and *** stand for significance levels of 10%, 5%, and 1%, respectively.
4. Explanatory variables are period-dummies for the year of the crisis (=T) and after.

45

Table 4. Macroeconomic Dynamics after the Financial Crises: Summary

Output Growth
Inflation
Depreciation
Policy Interest Rate
Loan Rate
Deposit Rate
SpreadDemand Deposit Growth
Demand Deposit/ GDP
Total Deposit Growth
Total Deposit/ GDP
Bank Credit Growth
Bank Credit/ GDP
Investment/ GDP
Trade Surplus/ GDP
Fiscal Surplus/ GDP

Cross-Country
East Asia, 1980s
East Asia, 1997
(-)
(-)
(-)
persistentpersistent
(-)
(-)
(+)
(+)
persistent
none
(+)
none
none
(+)
(+)
none
(+)
none
none
(+)
persistent
(+)
none
(+)
(-)
(-)
(-)
persistent
none
none
(-)
NA
(-)
(-)
persistent(+)
persistent(+)
persistent(+)(-)
persistentnone(-)
persistent(+)
persistent(+)
persistent(+)
persistent(-)(-)
persistent(-)
persistentpersistent
NA
none
(+)
none
none
(-)
persistentNote: 1. Signs of significant deviations from the pre-crisis levels. "none": no significant deviations.
2. "Persistent" implies prolonged deviations over the entire post-crisis period.
3. "NA": not available.

Figure 1. Macroeconomic Dynamics before and after the Financial Crisis, East Asia (T=6)
output growth, 1997

Inflation, 1997

0.15

0.8

0.1
0.05
0
1

-0.05
-0.1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

-0.15

Thailand
Malaysia
Indonesia
Philippines
Korea

0.6
0.4
0.2
0
-0.2

1

2

4

5

6

7

8

9

Real Policy Interest Rates, 1997

Depreciation, 1997
3
2.5
2
1.5
1
0.5
0
-0.5

3

20
Thailand
Malaysia
Indonesia
Philippines
Korea
1

2

3

4

5

6

7

8

10
0
-10

1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

-20

9

Interest Rate Spead, 1997

Demand Deposit Growth, 1997
1

10
5
0
1

-5

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

0.5
0
-0.5

1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

-1

-10

Total Deposit Growth, 1997

Bank Credit Growth, 1997

0.4

0.6

0.3
0.2
0.1
0
1

-0.1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

-0.2

0.4
0.2
0
-0.2
-0.4

1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

-0.6
Trade Surplus/ GDP, 1997

Investment/ GDP, 1997
0.3

0.5
0.4
0.3
0.2
0.1
0

Thailand
Malaysia
Indonesia
Philippines
Korea
1

2

3

4

5

6

7

8

Fiscal Surplus/ GDP, 1997
0.04

0
-0.02
-0.04
-0.06

1

2

3

4

5

6

7

8

9

0.1
0
-0.1
-0.2

9

0.02

0.2

Thailand
Malaysia
Indonesia
Philippines
Korea

1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Korea

Figure 2. Macroeconomic Dynamics before and after the Financial Crises, 1980s (T=5)
Output Growth, 1980s

Inflation, 1980s

0.15

0.6

0.1
0.05
0
1

-0.05

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Singapore

0.4
0.2
0
-0.2

-0.1

1

2

Depreciation, 1980s

3

0.2
0
1

-0.2

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Singapore

7

8

9

10
0
-10

1

2

3

2

3

4

5

6

7

8

0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8

1

2

3

0.6

0
1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Singapore

-0.4

0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6

1

2

3

Investment/ GDP, 1980s
0.6
0.5
0.4
0.3
0.2
0.1
0
2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

9

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Singapore

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
Singapore

1
0.5
0
-0.5
-1

Fiscal Surplus/ GDP, 1980s

1

8

Trade Surplus/ GDP, 1980s

Thailand
Malaysia
Indonesia
Philippines
Singapore1

7Bank Credit Growth, 1980s

Total Deposit Growth, 1980s

0.2

6Demand Deposit Growth, 1980s

9

0.4

5

Thailand
Malaysia
Indonesia
Philippines
Singapore-30

Thailand
Malaysia
Indonesia
Philippines
Singapore
1

4

-20

Interest Rate Spread, 1980s

0.1
0.05
0
-0.05
-0.1
-0.15
-0.2

6

20

0.4

-0.2

5

Real Policy Interest Rates, 1980s

0.6

12
10
8
6
4
2
0
-2

4

Thailand
Malaysia
Indonesia
Philippines
Singapore

Thailand
Malaysia
Indonesia
Philippines
Singapore

1

2

3

4

5

6

7

8

9

Thailand
Malaysia
Indonesia
Philippines
SingaporeAppendix. Data Sources and Definitions
Variable
Definition
Output1 Output Growth
Growth Rate of Real GDP
Prices2 Inflation
Growth Rate of GDP Deflator
3 Exchange Rate Depreciation
Depreciation of Nominal Exchange Rate (annual average)
4 Short-Term Interest Rate
Nominal Short-Term Interest Rate minus Inflation
Interest Rates
5 Loan Rate
Nominal Loan Interest Rate minus Inflation
6 Deposit Rate
Nominal Deposit Interest Rate minus Inflation
7 Spread
Nominal Loan Rate minus Nominal Deposit Rate
Bank Deposits
8 Demand Deposit Growth
Growth Rate of Real DMB Deposits
9 Demand Deposit/ GDPDMB Demand Deposits/ GDP
10 Total Deposit Growth
Growth Rate of Real DMB Total Deposits
11 Total Deposit/ GDPDMB Total Deposits/ GDP
Bank Credits
12 Bank Credit Growth
Growth Rate of Real DMB Credits
13 Bank Credit/ GDPDMB Credits/ GDP
Expenditures
14 Investment/ GDP
Investment/ GDP
15 Trade Surplus/ GDP
Exports minus Imports of Goods & Services
16 Fiscal Surplus/ GDP
Fiscal Surplus/ GDP
Source: IMF, International Financial Statistics , CD-ROM, June 2001.

Data Source
IFS
IFS
IFS
IFS
IFS
IFS

99b.p
99b
rf
60b or 60c
60p
60l

IFS
IFS
IFS

24

IFS

22

IFS
IFS
IFS

93
90c, 98c80

24+25