Chapter

Bank Lending and Contagion

Graciela L. Kaminsky and Carmen M. Reinhart

in Regional and Global Capital Flows

Published by University of Chicago Press

Published in print July 2001 | ISBN: 9780226386768
Published online February 2013 | e-ISBN: 9780226387017 | DOI: http://dx.doi.org/10.7208/chicago/9780226387017.003.0004
Bank Lending and Contagion

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This chapter analyzes how the crisis in Asia spread during the second half of 1997. The main findings can be summarized as follows. First, as regards the propagation of shocks across national borders during the Asian crisis, the behavior of foreign banks, particularly Japanese banks that began drastically to curtail their lending to the affected Asian countries following the Thai devaluation, appears to have played a role in spreading the crisis, particularly to Indonesia, Malaysia, and South Korea. Second, only Malaysia and South Korea appear to have any significant trade links to Thailand. Thus, the spread of crisis to Indonesia and the Philippines cannot be explained through interdependence arising from a substantial volume of trade in goods and services. Third, the contagion vulnerability indexes do reasonably well in anticipating which countries were most vulnerable to contagion in three recent crises episodes (the Mexican 1994 devaluation, Brazil's crisis in early 1999, and the Asian episode). Fourth, the evidence from the daily data suggests that the patterns of causality and interdependence do change during the course of the crisis, as turbulence in affected countries such as Indonesia begins to have additional feedback effects on the other countries, including the initial crisis country, Thailand. Lastly, Malaysia's interest rates remain uninfluenced by shocks to other interest rates in the region in the post-crisis sample. This result may be due to the presence of extensive capital controls—an issue which merits further scrutiny. Two commentaries are included at the end of the chapter.

Keywords: Asian financial crises; foreign banks; Japanese banks; devaluation; Thailand; Indonesia; Malaysia; South Korea; contagion vulnerability indexes

Chapter.  11961 words.  Illustrated.

Subjects: International Economics

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