ABSTRACT
The chapter discusses on broader issues regarding the interest rate policy after the crisis in Korea. The chapter argues whether the high interest rate policy of the International Monetary Fund (IMF) was effective in stabilizing the exchange rate. It provides an analytic framework to understand the essence of the debate on the relationship between the interest rate and the exchange rate. It then presents various regressions whose specifications are motivated by framework. Although the major driving force of the exchange rate stabilization seems to be the recovery of the foreign currency liquidity position, the high interest rate appears to have contributed to stabilizing the exchange rate until the liquidity position was recovered. The chapter explicitly considers risk factors, the key variables of the Furman-Stiglitz argument. According to the expression of Furman and Stiglitz (1998), the temporarily high interest rate policy seems to have 'bought time' until economic fundamentals recovered.
