Gradualism and Chinese financial reforms

China ; Banks and banking - China ; Monetary policy - China

The disposition of failed Japanese bank assets: lessons from the U.S. savings and loan crisis

This paper reviews the Japanese experience with “put guarantees” recently offered in the sale of several failed banks. These guarantees, meant to address information asymmetry problems, are shown to create moral hazard problems of their own. In particular, the guarantees make acquiring banks reluctant to accept first-best renegotiations with problem borrowers. These issues also arose in the U.S. Savings and Loan crisis. Regulators in that crisis turned to an alternative guarantee mechanism known as “loss-sharing arrangements,” with apparently positive results. I introduce a formal debt model to examine the conditions determining the relative merits of these guarantees. The results show that both forms of guarantees reduce expected regulator revenues, but that the impact of economic downturns on the relative desirability of the two guarantees is ambiguous. ; Published in FRBSF Economic Review (2002), p 1-15Japan

Financial globalization and monetary policy discipline

The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences.Monetary policy ; Inflation (Finance) ; Globalization

Financial development and growth: are the APEC nations unique?

This paper examines panel evidence concerning the role of financial development in economic growth. I decompose the well-documented relationship between financial development and growth to examine whether financial development affects growth solely through its contribution to growth in factor accumulation rates, or whether it also has a positive impact on total factor productivity, in the manner of Benhabib and Spiegel (2000). I also examine whether the growth performances of a subsample of APEC countries are uniquely sensitive to levels of financial development. The results suggest that indicators of financial development are correlated with both total factor productivity growth and investment. However, many of the results are sensitive to the inclusion of country fixed effects, which may indicate that the financial development indicators are proxying for broader country characteristics. Finally, the APEC subsample countries appear to be more sensitive to financial development, both in the determinations of subsequent total factor productivity growth and in rates of factor accumulation, particularly accumulation of physical capital.Economic development ; Asia Pacific Economic Cooperation (Organization)

Bank charter value and the viability of the Japanese convoy system

This paper compares the performance of a convoy banking system, similar to that which prevailed in Japan, to a fixed-premium deposit insurance regime. Under this system, failed banks are merged with healthy banks, rather than closed, so that the banking system itself provides the safety net for guaranteed deposits. While neither regime is generally preferable over the other, the results show that the performance of the convoy system is more sensitive to changes in bank charter values and the overall health of the banking system. The recent breakdown of the convoy system may therefore be partly attributable to adverse changes in these characteristics in the Japanese banking system.Banks and banking - Japan

Threshold effects in international lending

The author's dynamic model of international borrowing subject to credit constraint was developed for an economy with increasing returns to physical capital. Increases in the capital stock within the nonconvex range increase debtor borrowing opportunities. Conversely, a temporary liquidity shock may permanently lower the economy's growth path. Introducing aggregate nonconvexities also has different implications for policy on debt overhangs. In particular, the model allows for rational relending by creditors. It also predicts that new money ( or interest capitalization ) is in the interest of creditors and will be part of a debt restructuring strategy - as it was recently for Mexico and the Philippines.Economic Theory&Research,Banks&Banking Reform,Economic Growth,Environmental Economics&Policies,Housing Finance

Takeoffs

This paper identifies factors associated with takeoff -- a sustained period of high growth following a period of stagnation. We examine a panel of 241 "stagnation episodes" from 146 countries, 54 % of these episodes are followed by takeoffs. Countries that experience takeoffs average 2.3% annual growth following their stagnation episodes, while those that do not average 0% growth; 46% of the takeoffs are "sustained," i.e. lasting 8 years or longer. Using probit estimation, we find that de jure trade openness is positively and significantly associated with takeoffs. A one standard deviation increase in de jure trade openness is associated with a 55% increase in the probability of a takeoff in our default specification. We also find evidence that capital account openness encourages takeoff responses, although this channel is less robust. Measures of de facto trade openness, as well as a variety of other potential conditioning variables, are found to be poor predictors of takeoffs. We also examine the determinants of nations achieving sustained takeoffs. While we fail to find a significant role for openness in determining whether or not takeoffs are sustained, we do find a role for output composition: Takeoffs in countries with more commodity-intensive output bundles are less likely to be sustained, while takeoffs in countries that are more service-intensive are more likely to be sustained. This suggests that adverse terms of trade shocks prevalent among commodity exports may play a role in ending long-term high growth episodes.