| By: |
Robert Dekle;
Kenneth Kletzer |
| Abstract: |
An endogenous growth model with financial intermediation is used to show how
public deposit insurance and weak prudential regulation can lead to banking
crises and permanent declines in economic growth. The impact of regulatory
forbearance on investment, saving and asset price dynamics under perfect
foresight are derived in the model. The assumptions of the theoretical model
are based on essential features of the Japanese financial system and its
regulation. The model demonstrates how banking and growth crises can evolve
under perfect foresight. The dynamics for economic aggregates and asset prices
predicted by the model are shown to be generally consistent with the
experience of the Japanese economy and financial system through the 1990s. We
also test our maintained hypothesis of rational expectations using asset price
data for Japan over the 1980s and 1990s. An implication of our analysis is
that delaying the resolution of banking crises adversely affects future
economic growth. |
| Keywords: |
Financial crises - Japan ; Deposit insurance ; Bank supervision ; Economic development |
| Date: |
2004 |
| URL: |
https://d.repec.org/n?u=RePEc:fip:fedfpb:2004-26 |