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

  • Takuji Kinkyo


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

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    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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    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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    18. Wei Ding & Domac, Ilker & Ferri, Giovanni, 1998. "Is there a credit crunch in East Asia?," Policy Research Working Paper Series 1959, The World Bank.
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    23. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
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