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Exchange rate constraints and money control in Korea

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  • Gyuhan Kim
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    Abstract

    This paper applies two traditional empirical approaches to investigate how successfully Korea managed to control money supply in response to the changes in foreign reserves since 1980. One is to estimate offset coefficients and the other is to estimate sterilization coefficients. The estimation results are as follows. Reflecting strict and effective capital controls, the domestic monetary policies were partially offset mainly by short-term capital flows. The Bank of Korea pursued sterilization policies very actively. Particularly, sterilization was more active during the late 1980s of huge current account surplus than during the early 1990s of a surge in capital flows. There were over-sterilization during the early 1 980s when foreign reserves kept dropping, which implied that monetary policies were directed to worsening the balance of payments deficit rather than improving it.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-011.

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    Date of creation: 1995
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    Handle: RePEc:fip:fedlwp:1995-011

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    Keywords: Foreign exchange - Law and legislation ; Korea ; Money supply;

    References

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    1. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
    2. Ratianni, Michele, 1977. "A note on the theory of offsetting capital flows," Journal of Monetary Economics, Elsevier, vol. 3(1), pages 133-138, January.
    3. Jurgen Von Hagen, 1989. "Monetary targeting with exchange rate constraints: the Bundesbank in the 1980's," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 53-69.
    4. Daniel M. Laskar, 1983. "Short-Run Independence of Monetary Policy under a Pegged Exchange-Rates System: An Econometric Approach," NBER Chapters, in: The International Transmission of Inflation, pages 314-348 National Bureau of Economic Research, Inc.
    5. Jacob A. Frenkel & Michael L. Mussa, 1980. "Monetary and Fiscal Policies in an Open Economy," NBER Working Papers 0575, National Bureau of Economic Research, Inc.
    6. Kanniainen, Vesa, 1984. "On Offsetting Capital Flows and Monetary Autonomy of a Small Open Economy," Economica, London School of Economics and Political Science, vol. 51(202), pages 177-86, May.
    7. Frenkel, Jacob A & Mussa, Michael L, 1981. "Monetary and Fiscal Policies in an Open Economy," American Economic Review, American Economic Association, vol. 71(2), pages 253-58, May.
    8. Nouriel Roubini, 1988. "Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank," NBER Working Papers 2777, National Bureau of Economic Research, Inc.
    9. Ramon Moreno, 1993. "Exchange rate policy and insulation from external shocks: the experiences of Taiwan and Korea, 1970-1990," Pacific Basin Working Paper Series 93-05, Federal Reserve Bank of San Francisco.
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    Cited by:
    1. Alice Y. Ouyang & Ramkishen S. Rajan & Thomas D. Willett, 2007. "China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients," Working Papers 102007, Hong Kong Institute for Monetary Research.
    2. Lim, Ewe Ghee & Goh, SooKhoon, 2011. "Is Malaysia exempted from impossible trinity: empirical evidence from 1991-2009," MPRA Paper 30804, University Library of Munich, Germany.

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