Nonlinear Effects of Monetary Policy on International Capital Flows (in Korean)

This paper investigates whether monetary policy has nonlinear effects on the flows of international capital. After estimating a behavioral equation for international capital flows, we find that tightening monetary policy shocks cause international capital inflows to increase by raising the returns on investment, and that easing monetary policy shocks also lead to increased inflows of international capital by affecting investors¡¯ expectations of future economic conditions. We also find that the effects of monetary policy on international capital flows are not large during periods of low interest rates, and that in the low interest rate conditions since the global financial crisis its effects have weakened. This implies that, as the level of the Base Rate is increased in the future, the policy effects on international capital flows could be strengthened. The contribution of this paper is that, using our behavioral equation for international capital flows, we decompose the direct and indirect effects of monetary policy and check the nonlinear channel of monetary policy transmission to international capital flows. Although there are methodological limits in estimating the behavioral equation, the finding that monetary policy has statistically significant nonlinear effects on international capital flows implies that the monetary policy analysis should closely consider nonlinear effects as well.