Financial restraints in the South Korean miracle

We provide novel empirical evidence on the effects of financial restraints on South Korean financial development. The evidence is linked to a simple m odel of the Korean banking system that encapsulates its cartelised nature, which predicts a positive association between financial development and (i) the degree of state control over the banking system, (ii) mild repression of lending rates. The model also predicts that in the presence of lending r ate controls, increases in the level of the administered deposit rate are u nlikely to influence financial deepening. We test the model empirically by constructing individual and summary measures of financial restraints. Our e mpirical findings are consistent with our theoretical predictions but contr ast sharply with the predictions of earlier literature that postulates that interest rate ceilings and other financial restraints constitute sources o f 'financial repression'. (C) 2001 Elsevier Science B.V. All rights reserve d.