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Macroeconomic Impacts of the Korean Financial Crisis: Comparison with the Cross­country Patterns

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  • Jong­Wha Lee

    (Harvard University and Korea University)

  • Changyong Rhee

    ()
    (Seoul National University and University of Rochester)

Abstract

This paper analyzes the macroeconomic adjustment process of the Korean financial crisis in a broad international perspective. In particular, the impacts of the crisis on GDP growth, inflation, current account balance, and employment are analyzed using a cross­ country data set, which compiled 150 financial crisis episodes from all developing countries that have received conditional financial assistance from the IMF over the period from 1973 to 1994. The cross country patterns show that GDP growth rates sharply drop with the eruption of a crisis but then recover quickly to the pre­crisis level in two or three years, showing a v­ pattern of adjustment; inflation and current account deficit exhibit an inverse v­pattern, but they do not improve to the level of non­program period; employment growth is most sluggish in the recovery process compared with other macroeconomic variables. We find that the Korean case is in general consistent with these stylized patterns. However, the degree of initial contraction and following recovery has been far greater in Korea than what the cross­country evidence predicts. Cross­country comparison indicates that both the export­oriented structure and the swift adjustment of macroeconomic policies contributed to the speedy adjustment of the Korean economy.

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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 471.

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Length: 40 pages
Date of creation: May 2000
Date of revision:
Handle: RePEc:roc:rocher:471

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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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  1. Louis Dicks-Mireaux & Miguel A. Savastano & Adam Bennett & María Vicenta Carkovic S. & Mauro Mecagni & James John & Susan Schadler, 1995. "IMF Conditionality," IMF Occasional Papers, International Monetary Fund 128, International Monetary Fund.
  2. Simon Johnson & Peter Boone & Alasdair Breach & Eric Friedman, 1999. "Corporate Governance in the Asian Financial Crisis," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 297, William Davidson Institute at the University of Michigan.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  5. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
  6. Borensztein, Eduardo & Lee, Jong-Wha, 2002. "Financial crisis and credit crunch in Korea: evidence from firm-level data," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(4), pages 853-875, May.
  7. Tony Killick, 1995. "Can the IMF Help Low-Income Countries? Experiences with its Structural Adjustment Facilities," The World Economy, Wiley Blackwell, Wiley Blackwell, vol. 18(4), pages 603-616, 07.
  8. Mohsin S. Khan, 1990. "The Macroeconomic Effects of Fund-Supported Adjustment Programs," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 195-231, June.
  9. International Monetary Fund, 1998. "Do IMF-Supported Programs Work? a Survey of the Cross-Country Empirical Evidence," IMF Working Papers, International Monetary Fund 98/169, International Monetary Fund.
  10. Jong-Wha Lee & Changyong Rhee, 1999. "Social Impacts of the Asian Crisis: Policy Challenges and Lessons," Working Paper Series, Institute of Economic Research, Seoul National University no2, Institute of Economic Research, Seoul National University.
  11. Jeffrey D. Sachs, 1985. "External Debt and Macroeconomic Performance in Latin America and East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 523-573.
  12. Corbo, Vittorio & Fischer, Stanley, 1995. "Structural adjustment, stabilization and policy reform: Domestic and international finance," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 44, pages 2845-2924 Elsevier.
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Cited by:
  1. Marcus Noland, 2007. "South Korea's Experience with International Capital Flows," NBER Chapters, National Bureau of Economic Research, Inc, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 481-528 National Bureau of Economic Research, Inc.
  2. Bernd Hayo & Doh Chull Shin, 2002. "Popular Reaction to the Intervention by the IMF in the Korean Economic Crisis," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(2), pages 89-100.
  3. José de Gregorio & Jong-Wha Lee, 2004. "Growth and Adjustment in East Asia and Latin America," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  4. Siegel, Jordan, 2005. "Can foreign firms bond themselves effectively by renting U.S. securities laws?," Journal of Financial Economics, Elsevier, Elsevier, vol. 75(2), pages 319-359, February.

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