As a result, monetary policymakers in emerging markets often reacted to crises – such as the Asian financial crisis of the late 1990s – by raising rather than lowering policy rates, in order to defend the value of the currency, slow capital flight, and bolster the credibility of monetary policy.
Likewise, the scope for fiscal expansion was severely limited by concerns about medium-term fiscal sustainability. Why was this crisis different? In particular, why was the Bank of Korea able to respond in a countercyclical manner this time, reducing rather than raising the policy rate in response to the downturn?