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

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 crosscountry 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 pre-crisis level in two or three years, showing a v-pattern of adjustment; inflation and current account deficit exhibit an inverse v-pattern, but they do not improve to the level of non-program 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 export-oriented structure and the swift adjustment of macroeconomic policies contributed to the speedy adjustment of the Korean economy.