Drawing on the Indonesian experience in 1997, this paper demonstrates the complexity of managing banking crises deals. It aims at deriving conclusions from this experience for other developing countries facing similar problems. The paper also refers to comparative experiences of other countries, in particular Malaysia and Thailand, examines the IMF programme and reveals its shortcomings.
The key question is to what extent the ineffectiveness and slow progress of bank restructuring, corporate restructuring and continued dilemmas in macroeconomic management in Indonesia were due to shortcomings of the economic programme, its sequencing or emphasis, and to what extent it has to be attributed other factors, including corruption and lack of policy-making capacity.
What is the liquidity effect and how to model it are two frequently debated questions among monetary economists, that have received extensive attention in recent years. Evidence based on a structural VAR shows that when the Fed surprises financial markets by suddenly decreasing the rate of money growth through an open market sale, the nominal interest rate rises on impact, in company with a drop in aggregate employment and output. Prices, however, are affected gradually. This is the so called liquidity effect. Therefore, any plausible model of monetary policy should account for this behavior. Several competing monetary models currently exist with each employing a different transmission mechanism of monetary policy.
Two of the most popular transmission mechanisms of monetary shocks in the recent literature are price stickiness and financial market frictions. In a sticky price environment, such as Kydland (1989) and Christiano (1997), monopolistically competitive producers are unable to immediately adjust prices in response to a monetary shock. Those models attempt to explain the responses of aggregate output and prices, but fail to generate observed variability in the nominal interest rates following a monetary policy shock. On the other hand, in a limited participation environment, for instance Lucas (1990) and Fuerst (1992), money plays a role in the economy due to its asymmetric distribution among economic agents. Those models, in contrast to sticky price models, give rise to a small liquidity effect, but have difficulty in producing the appropriate effects on output and prices. Moreover, the liquidity effect in those models exhibits no persistence and only exists in the impact period of the policy action. To reproduce the desired liquidity effect, several remedies have been proposed, one of which (Christiano, Eichenbaum and Evans (CEE) 1997) suggests that embedding labor market frictions into either type of model might help generate the liquidity effect and prolong the impact of monetary shocks.
Increasing mortgage delinquencies and the resulting financial turmoil have put the US financial system on trial. In particular, lenders have been accused of having engaged in a reckless expansion of credit to borrowers that had no capacity to repay their debt.
Financial innovation, deregulation, and the widespread failure of the supervisory and regulatory frameworks have often been blamed as the culprits. In particular, several studies have identified the rapid expansion of securitization as an important factor behind the excessive decline in lending standards. Less attention has been paid to how changes in market structure have affected lender behavior or to the role played by regulation. This paper attempts to fill that gap.
