Determinants Affecting Severity in Financial Crises: A Successful Approach for Reintegration into the International Financial Market

Abstract

The purpose of this paper is to analyze what elements are necessary for a rapid recovery from a financial crisis, and then, for sustainable development under global financial integration. There are two main findings. First, more careful removal of control on (short-term) capital flow and prudential management of capital movement are significant policy choice in avoiding huge financial vulnerability. Secondly, a relaxation of fiscal policy stance in the post-crisis period appears to be important for less deeper recession. However, the regression analysis does not show the effectiveness of monetary policy, in a recovery process, partly because the positive effect of the policy, which contributes to the recovery of market confidence through exchange rate stability, is offset by the negative impact of a high interest rate on investment. This implies that crisis countries are required to shift toward expansionary policy stance in more appropriate timing for a quicker recovery, as the Asian experience shows.