Abstract

When Korea was hit hard by the financial crisis in 1997, the IMF rescue program included a high interest rate policy for more than three months to stabilize the won/dollar exchange rate. The short-term inter-bank interest rate was raised to 30 percent on December 26, 1997 in response to the exchange rate plummeting from 900 to 2,000 Korean won against the U.S. dollar. As the exchange rate stabilized, the short-term interest rate started to ease following an agreement between the Korean government and the IMF on February 7, 1998. Thereafter the interest rate was gradually lowered as the situation in the foreign exchange market improved. The interest rate fell below its precrisis level in the middle of 1998, and has remained low since then.