Is It a Heavy Log that Broke the Camel’s Back?
Evidence of the Credit Channel in Taiwan’s Construction Industry

Abstract

Since the 1997 Asian financial crisis, the monetary authority of Taiwan decreased the interest rate nine times and had every intention to maintain a loose monetary policy. However, the lending amounts to the construction industry decreased much more sharply in spite of an increased monetary supply. Hence, the loose monetary policy has not reduced the financial constraints of the construction firms in Taiwan. In this paper, we investigate that the credit channel of monetary policy how to works at the Taiwan’s construction industry. We explain the reasons for financial constraints in the construction industry in Taiwan. Construction firms whose information is considerably opaque, are likely to be viewed as “lemons”, which accounts for the credit crunch policy of banking lending to these construction firms. Two strands of evidence support this view. First, the borrowing terms for the construction industry have been more restrictive than those for other industries firms during the same period of financial difficulty. Second, we determine that such financial constraints vary systematically within different industry groups. The results substantiate that construction firms retain more internal funds for future investment, and the sign of the liquidity coefficient is significant in their investment function. The evidence shows construction firms bear most of the reductions in bank loan supply, and that they are more bank-dependent.
 

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