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This paper studies the effects of the United States' (US) quantitative easing on Asia by examining capital flows and financial markets. After the global financial crisis, Asian economies with more open and developed capital markets experienced greater swings in capital inflows. In particular, large capital flows were manifest more in portfolio investment and other investment such as bank loans than in foreign direct investment. Empirical analysis shows quantitative easing, in particular the first round, significantly contributed to the rebounding of capital inflows to the region after the onset of the crisis by lowering domestic yield rates as well as credit default swap premiums. Although the currency value responses differed across countries, it appears that economies with stable exchange rates roughly coincide with those in which housing prices have been rising, suggesting that monetary easing of advanced countries have affected Asian countries through either appreciation of currency values or increases in the prices of housing.

This paper argues that the Republic of Korea (hereafter Korea) is not immune to global crises, but that a more than proportional response of gross domestic product to global crises does not seem to be the general case either. Along this line of reasoning, Korea's extreme response to the current crisis in the fourth quarter of 2008 was attributed not only to the crisis in the United States, but also to additional idiosyncratic components, such as the extraordinary collapse of the People's Republic of China's (PRC) imports and the drastic capital outflow from Korea. The paper also emphasizes the differences between the current recession and the currency crisis period. The currency crisis was mainly attributed to the internal fragility of Korea's financial market, but the current recession was caused mostly by external shocks. This difference was clearly reflected in the different responses of private consumption and exports, and hence employment. In the dimension of macroeconomic policy reactions, monetary policy was far more flexible this time than during the currency crisis period. From this analysis, two implications are drawn. First, as far as the economic response of the fourth quarter of 2008 being more extreme than necessary to rebalance the macroeconomic fundamentals in Korea, it is expected that those economic losses can be recovered relatively soon. Yet, for a more visible recovery of the Korean economy, the recovery of the PRC's domestic demand seems necessary, and a full-blown recovery will be in line with the global recovery. A second implication is that structural aspects are critical for maintaining economic stability as well as employing flexible macroeconomic policies. While the Korean economy plunged into a historic crisis in 1997 - triggered by the relatively small external shock of the Thai baht crisis - the economy is expected to remain relatively robust this time, even in the midst of the most serious global crisis since the Great Depression.

This paper discusses Korea's post-crisis monetary policy, focusing on two questions: (i) whether the high interest rate policy right after the outbreak of crisis was effective on exchange rate stabilization and (ii) whether the post-crisis interest rate policy can be justified in light of the optimal monetary policy rule framework. In the first part, this paper presents a theoretical framework that explains how a temporarily high interest rate policy can stabilize the depreciating exchange rate through either signaling effect or unanticipated monetary shock. As for empirical evidence, the paper summarizes the existing literature showing that the results are still inconclusive, but if there is any country in Asia where the policy was effective, it is likely to be Korea. Then the paper discusses conjectures that can explain this result for Korea. In the second part, this paper discusses monetary policy objectives and implied interest rate policy rules, and how to understand the post-crisis interest rate policy of Korea by comparing calibration results of such policy rules with the actual interest rate policy. The high interest rate policy in 1998 can be justified only when the actual (year-on-year) inflation rates as opposed to expected inflation rates were used. In contrast, the low interest rate policy since 1999 can be justified only when GDP deflator as opposed to Core CPI was used. Then the paper criticizes the actual year-on-year inflation rate as an inflation index for the monetary policy, and argues that the high interest rate policy appears hard to be justified from the second quarter of 1998.