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What makes international capital flows so volatile? : Push vs. pull factors in the case of Korea

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  • What makes international capital flows so volatile?
  • Kim, Tae-Joon; Ryou, Jai-Won
  • Korea Institute for International Economy Policy


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Title What makes international capital flows so volatile?
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Sub Title

Push vs. pull factors in the case of Korea

Material Type Articles
Author(English)

Kim, Tae-Joon; Ryou, Jai-Won

Publisher

[Seoul]:Korea Institute for International Economy Policy

Date 2010-12
Journal Title; Vol./Issue Journal of East Asian Economic Integration:vol. 14(no. 2)(December 2010)
Pages 27
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < Financial Policy
Holding Korea Institute for International Economy Policy

Abstract

This paper analyzes the determinants of financial capital flows in Korea, which provides an intriguing case for examining the volatility of such flows as an almost fully opened capital market. Our empirical analysis finds both pull and push factors have significantly affected all three types of foreign capital flows- foreign equity investment, foreign bond investment and foreign other-type investment- in Korea, though the relative importance of each factor varies by sample period and type of financial capital. First, the determinants of capital inflows changed substantially following the 1997 currency crisis. The impact of push factors on foreign investment strengthened, rendering the Korean stock and bond market more susceptible to external shocks. Second, the global financial crisis, which increased global financial instability and preference for safe assets, appears to have had a negative effect on other-type investment. However, fThis paper analyzes the determinants of financial capital flows in Korea, which provides an intriguing case for examining the volatility of such flows as an almost fully opened capital market. Our empirical analysis finds both pull and push factors have significantly affected all three types of foreign capital flows- foreign equity investment, foreign bond investment and foreign other-type investment- in Korea, though the relative importance of each factor varies by sample period and type of financial capital. First, the determinants of capital inflows changed substantially following the 1997 currency crisis. The impact of push factors on foreign investment strengthened, rendering the Korean stock and bond market more susceptible to external shocks. Second, the global financial crisis, which increased global financial instability and preference for safe assets, appears to have had a negative effect on other-type investment. However, foreign equity investment showed a quick recovery in the wake of global financial crisis. Third, the effects of capital account liberalization on capital flows appear more complicated than expected. Korea’s opening up of the stock market to foreign investors in 1992 did not usher in foreign equity investment. The liberalization of foreign portfolio investment after the 1997 crisis produced a significant effect on equity, but not on bond investment. Still, how to stabilize capital flows amid more deeply integrated domestic and foreign financial markets is another matter.