Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008–09?

47 Pages Posted: 2 Feb 2012

See all articles by Harun Alp

Harun Alp

Federal Reserve Board

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

Subir Lall

International Monetary Fund (IMF)

Date Written: Janurary 2012

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.

Keywords: Economic growth, Economic indicators, Economic models, Economic recession, Exchange rate regimes, Financial crisis, Fiscal policy, Flexible exchange rate policy, Global Financial Crisis 2008-2009, Inflation targeting, Korea, Republic of, Monetary policy, Monetary transmission mechanism

Suggested Citation

Alp, Harun and Elekdag, Selim Ali and Lall, Subir, Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008–09? (Janurary 2012). IMF Working Paper No. 12/5, Available at SSRN: https://ssrn.com/abstract=1997718

Harun Alp

Federal Reserve Board ( email )

20TH STREET AND CONSTITUTION AVENUE NW
WASHINGTON, DC District of Columbia 20551
United States

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Subir Lall

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202 623 6113 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
109
Abstract Views
774
Rank
450,735
PlumX Metrics