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An empirical analysis on government capital controls and international capital flows in Korea

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  • J. -H. Chung

Abstract

The present paper analyses government controls of international capital flows using Korean data. First, indexes of liberalizations are constructed on controls of capital inflows and outflows based on documented policy changes made by the Korean government. Second, VAR models are estimated that include the constructed capital liberalization indexes, capital flows, and other macroeconomic variables. It is found that capital inflows increase persistently after shocks to liberalization policy while capital outflows increase temporally. It is also found that shocks to liberalization of capital outflows attract capital inflows, a result explicable by two competing theories - that liberalization of capital outflows: (1) removes investment irreversibility; and (2) signals more friendly government policy in the future. Examination of the effects of separate capital liberalization measures concerning only Korean residents and those concerning only nonresidents confirms the importance of the 'signal effect'.

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  • J. -H. Chung, 2002. "An empirical analysis on government capital controls and international capital flows in Korea," Applied Economics Letters, Taylor & Francis Journals, vol. 9(14), pages 919-923.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:14:p:919-923
    DOI: 10.1080/13504850210138487
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    1. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, vol. 39(3-4), pages 273-295, November.
    2. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246, National Bureau of Economic Research, Inc.
    3. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
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    Cited by:

    1. Helder Ferreira de Mendonca & Manoel Carlos de Castro Pires, 2007. "Capital account liberalization and inflation: evidence from Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 14(7), pages 483-487.
    2. Karl F Habermeier & Annamaria Kokenyne & Chikako Baba, 2011. "The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows," IMF Staff Discussion Notes 11/14, International Monetary Fund.
    3. Xinhua Gu & Baomin Dong, 2012. "A simple model of two-country bargaining for financial integration," Applied Economics Letters, Taylor & Francis Journals, vol. 19(8), pages 725-728, May.
    4. Chikako Baba & Annamaria Kokenyne, 2011. "Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's," IMF Working Papers 2011/281, International Monetary Fund.

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