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Spot and foward market intervention during the 1997 Korean currency crisis

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  • Woosik Moon

    ()
    (Seoul National University, School of International and Area Studies, Seoul (Korea))

  • Yeongseop Rhee

    ()
    (Sookmyung University, Department of Economics, Seoul (Korea))

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    Abstract

    This study shows that, among the two crisis periods of 1997, January-March and September-November, the spot market interventions were effective in stabilizing the Korean currency in the first period, whereas there is no evidence that the forward market interventions were effective in either of these two periods. If anything, the forward market interventions resulted in a destabilization of the exchange rate. This result may be due to excessive use of forward market interven-tions from 20th October, when the forward premium tended to show amplifying movement. Although it was clear that the Korean won was no longer defendable by forward market interventions, the Korean monetary authorities intervened in vain to defend the Korean currency. The forward market intervention seemed to be heavily used because the BOK believed its efficacy of a bear squeeze and wanted to camouflage the drain in foreign reserves. However, wasting foreign reserves in this operation proved too costIy for the BOK and the Korean economy. The result of this study suggests that, only when forward premiums are maintained within some margin, forward market interventions may be an effective instrument for stabilizing the foreign exchange market, otherwise it can create unwanted results, precipitating only the collapse of the exchange rate and aggravating the drain of foreign reserves, especially in a crisis period.

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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9869/9751
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    Bibliographic Info

    Article provided by Banca Nazionale del Lavoro in its journal BNL Quarterly Review.

    Volume (Year): 59 (2006)
    Issue (Month): 238 ()
    Pages: 243-268

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    Handle: RePEc:psl:bnlaqr:2006:32

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    Related research

    Keywords: Crisis; Currency Crisis;

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    1. Owen F. Humpage, 1991. "Central-bank intervention: recent literature, continuing controversy," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 12-26.
    2. Peter M. Garber & Michael G. Spencer, 1995. "Foreign Exchange Hedging and the Interest Rate Defense," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 490-516, September.
    3. Graciela L. Kaminsky & Karen K. Lewis, 1996. "Does foreign exchange intervention signal future monetary policy?," Working Papers 96-7, Federal Reserve Bank of Philadelphia.
    4. Tsutomu Watanabe, 1992. "The signaling effect of foreign exchange intervention: the case of Japan," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    5. Ramon Moreno, 1997. "Lessons from Thailand," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov7.
    6. Tsutomu Watanabe, 1992. "The signaling effect of foreign exchange intervention: the case of Japan," Proceedings, Federal Reserve Bank of San Francisco, pages 258-286.
    7. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar..
    8. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
    9. Catherine Bonser-Neal, 1996. "Does central bank intervention stabilize foreign exchange rates?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-57.
    10. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    11. Subir Lall, 1997. "Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze," IMF Working Papers 97/164, International Monetary Fund.
    12. Peter M. Garber & Subir Lall, 1996. "Derivative products in exchange rate crises," Proceedings, Federal Reserve Bank of San Francisco, pages 206-231.
    13. Rogoff, Kenneth, 1984. "On the effects of sterilized intervention : An analysis of weekly data," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 133-150, September.
    14. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
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