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Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008-2009?

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Author Info

  • Subir Lall
  • Selim Elekdag
  • Harun Alp

Abstract

Korea was one of the Asian economies hardest hit by the global financial crisis. Anticipating the downturn that would follow the episode of extreme financial stress, the Bank of Korea (BOK) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 325 basis points. But did it work? This paper seeks a quantitative answer to the following question: Were it not for an inflation targeting framework underpinned by a flexible exchange rate regime, how much deeper would the recession have been? Taking the most intense year of the crisis as our baseline (2008:Q4?2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.1 percent contraction, the outturn would have been -2.9 percent if the BOK had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -7.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BOK helped substantially soften the impact of the global financial crisis on the Korean economy. These counterfactual experiments are based on an estimated structural model, which, along with standard nominal and real rigidities, includes a financial accelerator mechanism in an open-economy framework.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/5.

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Length: 47
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/5

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Related research

Keywords: Emerging markets; Economic growth; Economic indicators; Economic models; Economic recession; Exchange rate regimes; Flexible exchange rate policy; Global Financial Crisis 2008-2009; Inflation targeting; Monetary transmission mechanism;

This paper has been announced in the following NEP Reports:

References

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Citations

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Cited by:
  1. Selim Elekdag, 2012. "Social Spending in Korea," IMF Working Papers 12/250, International Monetary Fund.
  2. Jean Pierre Allegret, 2012. "Responses of Monetary Authorities in Emerging Economies to International Financial Crises: What Do We Really know?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 3-32.
  3. Selim Elekdag & Subir Lall & Harun Alp, 2012. "An Assessment of Malaysian Monetary Policy During the Global Financial Crisis of 2008-09," IMF Working Papers 12/35, International Monetary Fund.

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