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Macroeconomic Impacts of the Korean Financial Crisis: Comparison with the Cross-country Patterns

  • Jong-Wha Lee
  • Changyong Rhee

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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Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 25 (2002)
Issue (Month): 4 (04)
Pages: 539-562

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Handle: RePEc:bla:worlde:v:25:y:2002:i:4:p:539-562
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  1. 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.
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  9. Borensztein, Eduardo & Lee, Jong-Wha, 2002. "Financial crisis and credit crunch in Korea: evidence from firm-level data," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 853-875, May.
  10. Louis Dicks-Mireaux & Miguel A. Savastano & Adam Bennett & María Vicenta Carkovic S. & Mauro Mecagni & James John & Susan Schadler, 1995. "IMF Conditionality; Experience Under Stand-by and Extended Arrangements, Part I: Key Issues and Findings," IMF Occasional Papers 128, International Monetary Fund.
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  12. International Monetary Fund, 1998. "Do IMF-Supported Programs Work? a Survey of the Cross-Country Empirical Evidence," IMF Working Papers 98/169, International Monetary Fund.
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