CREDIT CRUNCH AND HOUSEHOLD WELFARE,THE CASE OF THE KOREAN FINANCIAL CRISIS*

We examine how the credit crunch in Korea in the late 1990s affected household behaviour and welfare. Using 1996–1998 household panel data, we estimate a consumption Euler equation, augmented by endogenous credit constraints. Korean households coped with the negative shocks of the 1997 credit crunch by reducing consumption of luxury items while maintaining food, education and health related expenditures. Our results show that, in 1997–1998, during the crisis, the probability of facing credit constraints and the resulting expected welfare loss from the binding constraints increased significantly, suggesting the gravity of the credit crunch at the household level.