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Why are there large foreign exchange reserves? The case of South Korea

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  • Why are there large foreign exchange reserves? The case of South Korea
  • Allen, Franklin; Hong, Joo Yun
  • Korean Social Science Research Council


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Title Why are there large foreign exchange reserves? The case of South Korea
Similar Titles
Material Type Reports
Author(English)

Allen, Franklin; Hong, Joo Yun

Publisher

[Seoul, South Korea]:Korean Social Science Research Council

Date 2011-12
Journal Title; Vol./Issue Korean Social Science Journal:vol. 38(no. 2)
Pages 33
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Financial Policy
Holding Korean Social Science Research Council

Abstract

In the 1997 Asian Financial Crisis, South Korea, which had been a very successful economy, was forced to raise interest rates and cut government spending by the IMF. These measures caused great economic distress. Because Asian countries were not well represented in the IMF’s governance structure, Korea could not effectively appeal the decision. We argue that what Korea and neighboring countries learned from this experience was that they had to accumulate their own reserves to self-insure against future crises. This self-insurance in East Asia has allowed Korea to navigate the current crisis well. However, the trillions of dollars of foreign exchange reserves accumulated in Asia have contributed to the ‘global imbalances’ that have played an important role in causing the current crisis. We suggest three possible solutions: reform of IMF governance, increased liquidity through regional risk sharing and foreign exchange swaps, and the Chinese RMB as a reserve currency.