Academic journal article Seoul Journal of Economics

The Global Financial Crisis and the Challenges of the Korean Economy

Academic journal article Seoul Journal of Economics

The Global Financial Crisis and the Challenges of the Korean Economy

Article excerpt

This paper analyzes why the U.S. financial crisis evolved into a global financial crisis, and why the Great Moderation led to the Great Recession. Then, the U.S. policy responses to the crisis are discussed and are compared with the policy measures prescribed by the IMF on the Korean economy immediately after the 1997 Korean Currency and Banking Crisis. The paper also deals with the sovereign debt crises of the Euro zone to analyze the needs for macro-prudendal regulation and supervision. The main focus of this paper, however, is to examine the impacts of the global financial crisis on the Korean economy, to evaluate the macro-policy measures meant to ride out the crisis, and to present the major challenges that Korea will face in the future. Given that internal and external risk factors abound, along with persistent uncertainties in the Korean economy, the policies on securing price, financial, exchange rate, and fiscal stability as well as stable economic growth are recommended.

Keywords: Global financial crisis. Great Recession, Sovereign debt crisis. Macro-prudential regulation. Macro-policy measures

JEL Classification: F34. G1, G21

I. Introduction

Given the unexpected outbreak and catastrophic impact of the Global Financial Crisis on the world economy, the importance of analyzing its causes and effects is incontrovertible. Moreover, it is essential to discuss the challenges brought about by the crisis on small open economies such as that of South Korea. The discussion of this paper is initiated with a brief look on the causes of the Global Financial Crisis, its impacts on the real economy, and its rapid spread to the global economy. I also cover the U.S. government's policy responses to the crisis and compare these with those of Korea. Subsequently, I analyze the impacts of the Global Financial Crisis on the Korean economy and Korea's policy responses to it. Then I turn to the current issues of Europe's sovereign debt crises, specifically focusing on the question, "Why do European countries still suffer from high rates of unemployment and sovereign debt problem?" In fact, numerous concerns have been raised as to whether or not the sovereign debt problem of the European Union might lead to another global banking and financial crisis, thereby causing a double dip in the world economy. Finally, after a brief discussion on the need for a macroprudential approach to financial regulations and supervision on the global economy, the paper covers major challenges that the Korean economy is currently facing in the midst of incremental uncertainty of the world economy.

II. The Causes and Impacts of the U.S. Financial Crisis and Policy Response

A. The Causes and Impacts of the U.S. Financial Crisis

One of the most distinctive features of the recent financial crisis is its origin and the global economic situation in which it took place. The crisis started in the U.S., the world's economic superpower, not in an emerging economy, and it happened amidst China's emergence as a new economic power, thus yielding significant impact on the restructuring of the global economy. The U.S. financial crisis was caused by botii government and market failure. 1 Specifically, the U.S. government took expansionary monetary policies in order to boost the national economy, which had been undergoing recession after the collapse of GG bubbles in the early 2000s. The expansionary monetary policies, however, did not take effect on the inflation rate over an extended period of time, mainly due to importations of cheap manufacturing goods from China and India. Nonetheless, die loosened money contributed to the formation of bubbles in real estates and housing markets. Moreover, the inflow of foreign capital resulting from a global imbalance further raised the money supply in the U.S.

Both the Clinton and Bush administrations implemented policies that provided incentives to personal housing ownership; in turn, these led to the proliferation of subprime loans granted to low-credit and low-income families. …

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