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The Korean Economy Beyond the Crisis

Edited by Duck-Koo Chung and Barry Eichengreen

Providing an integrated analysis of the event and its consequences, the chapters in the book consider the causes of the crisis, the response of the US government and International Monetary Fund, adjustments in the Korean monetary and fiscal policies, and the success of financial and corporate restructuring. The concluding chapters bring the story up-to-date, describing the aftermath of the crisis and assessing whether there has been sufficient reform to facilitate the country’s recovery and growth.
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Chapter 13: Recurrence of financial crises: cross-country patterns and implications for Korea

Kiseok Hong, Jong-Wha Lee and Changyong Rhee


13. Recurrence of financial crises: crosscountry patterns and implications for Korea1 Kiseok Hong, Jong-Wha Lee and Changyong Rhee INTRODUCTION While some economies have been ravaged repeatedly by financial crises in recent years, others have remained virtually unscathed. Table 13.1 shows the marked variation in the frequency of crises across countries. While some of the 110 developing countries listed there experienced no crises in recent decades, others experienced as many as five. The conclusion holds whether we measure recurrence by the number of currency crises, the number of banking crises, or the number of times a country went to the International Monetary Fund (IMF) for financial assistance.2 Korea is a member of the first category: it had never experienced a serious crisis until the one that broke out in late 1997. To be sure, the frequency of crises may vary across countries even when the ex ante probability of crisis is constant; some countries may simply be unlucky. But the differences in Table 13.1 seem to be too great to be ascribed to luck of the draw. One possible explanation is that the probability of a crisis depends on history. The likelihood of a crisis in the future may be higher in countries where crises have occurred in the past. In this chapter, we investigate this hypothesis using a large panel of developing countries and draw out the implications for the risk of further crises in Korea. The goal is to determine whether recent policy actions have eliminated the danger of...

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