Abstract
AbstractEvidence from the global financial crisis (2007–2008) and the Asian financial crisis (1997) have taught policymakers valuable lessons. The contagious effects of these crises have proven unavoidable and have led to negative economic development. However, South Korea, unlike other countries, has recovered remarkably from both episodes of financial turmoil and proved their ability to maintain positive growth throughout the two periods. This study investigates the correlation between the evolution of South Korean banking and corporate sector before, during and after these crises. A VAR model was employed to test the effectiveness of the South Korean government's policies, in response to the financial crisis from 1997 to 2017, using macroeconomic variables as proxies for newly introduced policies, and non-performing loans for controlled risks. The empirical results indicate impulse response functions which suggest that changes in macroeconomic variables as a representation for the policies resulted in a reduction of non-performing loans. This implies successful risk reduction and an overall economic recovery.
Highlights
In 1960, South Korea was amongst the world’s poorest countries with a GDP per capita of US $158
During the Asian financial crisis (AFC), the government increased the interest rates to restore inflows of foreign direct investment (FDI), as the International Monetary Fund (IMF)-led policy mandated the prioritisation of restoring investor confidence in the currency market
This study suggests that prudent structure and governance are essential in stabilising the economy and the financial system
Summary
In 1960, South Korea was amongst the world’s poorest countries with a GDP per capita of US $158. The key interpretations of the financial crisis in the case of South Korea can be categorised into three main factors: currency, foreign currency debts and liquidity crises. A currency crisis can be defined as a significant change in the exchange rate, followed by inflation The threshold for these changes is a sharp depreciation of at least 25%, cumulative over 12 months, and at least 10% points greater than in the preceding 12 months (Claessens and Kose 2013). The central bank resorted to using their foreign reserves, causing a depletion of the national reserves from $30 billion to less than $15 billion in November 1997. This led the country from a currency crisis to a liquidity crisis. The global financial crisis (GFC) revisited South Korea in 2007, yet they managed to maintain positive growth
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