are foreigners'claims on the country's residents. data on these claims are from haver and the u. s. bureau of economic analysis. whether the relationship shown in exhibit 3 is causal is not entirely clear, however, as economies that are more exposed to the global financial system also tend to be those economies most open to trade, as can be seen by comparing exhibit 3 to exhibit 2. macroeconomic imbalances and structural weaknesses likely magnified the effects of the adverse global shocks. it is important not to take the wrong lesson from the finding that more open economies were more severely affected by the global recession. although tighter integration with the global economy naturally increases vulnerability to global economic shocks, considerable evidence suggests that openness also promotes stronger economic growth over the longer term. protectionism and the erecting of barriers to capital flows should thus be strongly resisted. instead, as i will discuss, striking a reasonable balance between trade and growth in domestic demand is the best strategy for driving economic expansion. policy responses by and large, countries in asia came into the crisis with fairly strong macroeconomic fundamentals, including low inflation and favorable fiscal and current account positions. good fundamentals, in turn, provided scope for strong policy responses in many countries. china, japan, korea, and singapore were among those employing relatively aggressive policy strategies ; in particular, china undertook a sizable fiscal program, supplemented by accommodative monetary and bank lending policies. the stimulus packages in china and elsewhere have lifted domestic demand throughout the region, boosting intraregional trade. not all asian nations responded so aggressively to the crisis. some countries with weaker fiscal positions no doubt felt constrained in the extent of fiscal stimulus they provided. similarly, monetary policies were likely influenced by differences in inflation performance. on the one hand, countries experiencing low inflation or deflation, such as china, japan, and thailand, were able to implement expansionary monetary policies without concerns about increasing inflationary pressures. indeed, japan used unconventional monetary easing in part to avoid deeper deflation. on the other hand, inflation concerns were more pressing for indonesia, the philippines, and korea, with the result that their monetary policy responses may have been more muted than would otherwise have been the case. the national variation in policy responses likely also reflected differences in the severity of the crisis across countries. generally speaking, the asian response to the crisis appears thus far to have been effective. importantly, as i have suggested, the asian recovery to date has been in significant part the

reversal in capital flows engendered by the crisis, strains in banking appeared across asia, leading to severe credit tightening in some countries. fears of counterparty risk disrupted interbank lending in many countries, intensifying already existing funding difficulties. the drying up of the wholesale funding market hurt korea's banking system in particular ; prior to the crisis, it had accounted for about one - third of korean bank funding. in japan, some banks'exposures to equity markets damaged their capital positions. with asian banks experiencing dollar funding pressures similar to those arising elsewhere in the world, the federal reserve established 5 of its 14 liquidity swap lines with central banks in the region : australia, japan, korea, new zealand, and singapore. the reversal in capital flows also caused rapid exchange rate depreciation in some countries, particularly korea, indonesia, and malaysia. the korean won depreciated 40 percent against the dollar from the beginning of 2008 through its trough in march of this year, and it has only partially recovered. over the same period, the indonesian rupiah fell 22 percent against the dollar. exhibit 3 shows the relationship between rates of gdp growth during the downturn, relative to trend, and financial openness, as measured by the sum of each country's international assets and liabilities relative to its gdp. 7 the exhibit shows that, for both asian and nonasian economies, financial openness was associated with greater declines in output, though the linkage appears somewhat less tight than that for trade. 8 again, the most extreme cases are singapore and especially hong kong ( which is not shown, as it is more than twice as open as even singapore ). taiwan is another example of a financially open asian economy that experienced a particularly severe downturn. by the same token, china, india, and indonesia, the three asian countries in which output expanded throughout the crisis, are among the least financially open. trade and financial channels influenced other emerging markets as well, such as those in latin america and eastern europe. many of these economies also contracted sharply, but thus far they have recovered more slowly than economies in asia. in the case of latin america, closer links to the u. s. economy ( especially in the case of mexico ) and greater dependence on commodity exports ( whose prices declined during the most intense phase of the crisis ) were additional sources of weakness. in eastern europe, preexisting a country's international assets are claims on foreigners by its residents, and liabilities