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Transmission channels of capital flow shocks: why Korean crisis was so severe

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  • Takuji Kinkyo

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    (Department of Economics, SOAS, University of London, UK)

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    Abstract

    The Asian crisis highlighted the vulnerability of emerging market economies faced by sudden capital flow reversals. An important question that has critical implications for crisis management is how negative shocks in capital inflows were transmitted to economic activities, transforming financial instability into fully-fledged crises. Using VARs, this paper analyzes the transmission mechanism of capital flow shocks during the Korean crisis of 1997-98. Although it is commonly believed that severe economic contractions were caused by credit crunch, the analysis suggests that the major constraint for production was a steep rise in prices of imported inputs due to sharp exchange rate depreciations.

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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file28840.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, SOAS, University of London, UK in its series Working Papers with number 139.

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    Length: 38 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:soa:wpaper:139

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    Keywords: Capital flow shocks; Current account adjustments; VAR; Crisis; Korea;

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    1. Kim, Woochan & Wei, Shang-Jin, 2002. "Foreign portfolio investors before and during a crisis," Journal of International Economics, Elsevier, vol. 56(1), pages 77-96, January.
    2. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    3. Graciela L. Kaminsky & Carmen M. Reinhart, 2001. "Bank Lending and Contagion: Evidence from the Asian Crisis," NBER Chapters, in: Regional and Global Capital Flows: Macroeconomic Causes and Consequences, NBER-EASE Volume 10, pages 73-99 National Bureau of Economic Research, Inc.
    4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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    6. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
    7. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    9. Atish R. Ghosh & Swart R. Ghosh, 1999. "East Asia in the Aftermath," IMF Working Papers 99/38, International Monetary Fund.
    10. Choe, Hyuk & Kho, Bong-Chan & Stulz, Rene M., 1999. "Do foreign investors destabilize stock markets? The Korean experience in 1997," Journal of Financial Economics, Elsevier, vol. 54(2), pages 227-264, October.
    11. Dollar, David & Hallward-Driemeier, Mary, 2000. "Crisis, Adjustment, and Reform in Thailand's Industrial Firms," World Bank Research Observer, World Bank Group, vol. 15(1), pages 1-22, February.
    12. Bayoumi, Tamim, 2000. "The Morning After: Explaining The Slowdown In Japanese Growth In The 1990s," CEPR Discussion Papers 2436, C.E.P.R. Discussion Papers.
    13. Olivier Jeanne & Charles Wyplosz, 2003. "The International Lender of Last Resort. How Large Is Large Enough?," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 89-124 National Bureau of Economic Research, Inc.
    14. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
    15. Takuji Kinkyo, 2004. "Disorderly adjustments to exchange rate misalignments: The experience of Korea," Working Papers 140, Department of Economics, SOAS, University of London, UK.
    16. 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.
    17. Olivier Jeanne, 2001. "The International Lender of Last Resort," IMF Working Papers 01/76, International Monetary Fund.
    18. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    19. Wei Ding & Domac, Ilker & Ferri, Giovanni, 1998. "Is there a credit crunch in East Asia?," Policy Research Working Paper Series 1959, The World Bank.
    20. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    21. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    22. P. Bernd Spahn, 1995. "International Financial Flows and Transactions Taxes," IMF Working Papers 95/60, International Monetary Fund.
    23. Joon-Ho Hahm & Frederic S. Mishkin, 2000. "Causes of the Korean Financial Crisis: Lessons for Policy," NBER Working Papers 7483, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Ignacio Lozano & Ligia Alba Melo B. & Jorge Enrique Ramos F., 2012. "Flujos de capital y política fiscal en las economías emergentes de América Latina," BORRADORES DE ECONOMIA 009439, BANCO DE LA REPÚBLICA.
    2. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    3. Takuji Kinkyo, 2004. "Disorderly adjustments to exchange rate misalignments: The experience of Korea," Working Papers 140, Department of Economics, SOAS, University of London, UK.

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