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Capital Flows and Economic Fluctuations: The Role of Commercials Banks in Transmitting Shocks

Capital Flows and Economic Fluctuations: The Role of Commercials Banks in Transmitting Shocks by Yong Sarah Zhou
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This paper uses a general equilibrium model to examine the central role played by commercial banks in intermediating and amplifying the capital flow shocks to the local economy in the 1997 Asia financial crisis. It finds that a sudden stop of capital inflows affects the equilibrium credit supply through two channels: first, the plunge of foreign financing decreases the loanable funds directly; and second the sudden stop drives up the cost of providing banking services, thereby additionally reducing the available bank credit to firms through a "deposit run". Empirical results from a VAR model broadly support the theoretical implications.
International Monetary Fund; January 2008
30 pages; ISBN 9781452756158
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Title: Capital Flows and Economic Fluctuations: The Role of Commercials Banks in Transmitting Shocks
Author: Yong Sarah Zhou