| This dissertation explores the critical role of the banking system in emerging market countries' economic fluctuations. This task is extremely important because in those countries whose bond and equity markets are largely underdeveloped, banks play a central role in financial intermediation and the banking channel therefore is of particular significance as a conduit for domestic and foreign shocks.; Chapter 1 develops a general equilibrium, optimizing model of a small open economy to examine the central role played by domestic commercial banks in intermediating and amplifying capital flow shocks to domestic economy in the 1997 Asia financial crisis. The model implies that a sudden capital outflow will affect the equilibrium credit supply through two channels. Directly, the sudden stop of foreign financing was itself a contraction shock.; The resulting collapse of domestic bank funds obtained abroad severely restricted bank lending. Moreover, the drop in demand deposits resulting from the increased deposit spread, due to increased banking cost caused by the sudden outflow, reinforces the slump in bank credits available to the firms. Banks cut back their own lending both because of the fall of foreign funds and because of a domestic deposit run. Hence, the plunge in credits originating from the capital outflow is amplified by banks' pivotal role in the economy.; The protracted investment decline in post-crisis Asia, in contrast to a more rapid recovery of GDP, has remained a puzzle. Chapter 2 argues that an important source of emerging Asia's post-crisis investment decline was that producers of non-tradable goods were starved of financing. Estimation results of aggregate data support the strong correlation between bank credit and output to non-tradable firms. Results from a panel regression of firm level data provide further evidence that non-tradable sector firms face more stringent financial constraint than tradable firms do. As a result, Asia's rapid recovery has been driven by the growth of the tradable sector, which has been much less constrained by the credit shortfall. However, sustainable economic growth, as well as a successful unwinding of global imbalances, favors more balanced development, suggesting a need for policies to overcome impediments to investment in the non-tradable sector.; Chapter 3 surveys the literature that is closely related to the previous two chapters. |
