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International reserves management and capital mobility in a volatile world : Policy considerations and a case study of Korea

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  • International reserves management and capital mobility in a volatile world
  • Aizenman Joshua; Lee, Yeonho; Rhee, Yeongseop
  • National Bureau of Economic Research


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Title International reserves management and capital mobility in a volatile world
Similar Titles
Sub Title

Policy considerations and a case study of Korea

Material Type Reports
Author(English)

Aizenman Joshua; Lee, Yeonho; Rhee, Yeongseop

Publisher

Cambridge:National Bureau of Economic Research

Date 2004-06
Series Title; No NBER Working Paper Series / 10534
Pages 29
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Financial Policy
Holding National Bureau of Economic Research

Abstract

This paper characterizes the precautionary demand for international reserves driven by the attempt to reduce the incidence of costly output decline induced by sudden reversal of short-term capital flows. It validates the main predictions of the precautionary approach by investigating changes in the patterns of international reserves in Korea in the aftermath of the 1997-8 crisis. This crisis provides an interesting case study, especially because of the rapid rise in Korea's financial integration in the aftermath of the East-Asian crisis, where foreigners' shareholding has increased to 40% of total Korean market capitalization. We show that the crisis led to structural change in the hoarding of international reserves, and that the Korean monetary authority gives much greater attention to a broader notion of 'hot money,' inclusive of short-term debt and foreigners' shareholding.