Recent capital flow episodes in Korea and the effectiveness of policy responses to such capital flows are discussed. Capital account liberalization has strengthened the linkage between capital flows and financial market variables even in the short-term perspective. This paper demonstrates that some capital flows in the form of investment in bonds are driven by derivative-related trades. Furthermore, capital inflows respond to domestic financial variables more sensitively when those variables exhibit high volatility. The effectiveness of various policy measures has been at least partially constrained. Even monetary policy does not seem an exception, as transmission mechanism is significantly influenced by capital flows. As seen recently in the process of international financial unrest propagation, despite the health of Korea’s economic fundamentals, volatility in capital flows has increased sharply.
What have we learned from these experiences? First, once the capital account is liberalized, existence of a sound market structure is an absolute necessity. (The rest omitted)
Opening to capital flows and implications from Korea
[Seoul]:The Bank of Korea
|Series Title; No||Working Paper / no. 363|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||The Bank of Korea; KDI School|