The 1997-1998 Korean crisis: Domestic or external causes?

Domestic economic inefficiencies and imported panic have been alternatively argued to have caused the 1997-1998 Korean economic crisis. The aim of this paper is to determine which of the two hypotheses is the more likely to explain the fall in output that occurred during the crisis. A dynamic model of a small open economy is built and parameterized to fit the main characteristics of the Korean economy. Then, we perform some accounting, simulating it with the actual shocks to the domestic productive efficiency and to the foreign real interest rate. Both factors appear to have played an important role in the fall of output meaning that both theories are required for the model to be able to explain the amplitude of the fall in the output during the 1997-1998 Korean crisis.