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Financial and Capital Account Liberalization in the Pacific Basin: Korea and Taiwan during the 1980's

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  • Menzie D. Chinn
  • William F. Maloney

Abstract

This paper presents an alternative method of testing for financial capital mobility in the absence of forward exchange markets. A model of domestic interest rate determination during liberalization is applied to Korean and Taiwanese data. A variety of diagnostic and recursive tests are used to isolate structural breaks in the data. It is shown that Korean interest rates behave as if determined domestically until late 1988 or early 1989, while Taiwanese rates exhibit this behavior until early 1989. Thereafter, these economies' interest rates appear tightly linked to the EuroYen rate. These results contrast with those obtained by Reisen and Yches (1993) which indicated a single opening and closing for Korea, and no structural break for Taiwan. They also differ from those results of Jwa (1994) indicating two temporary openings for Korea. Greater integration of these domestic markets with world financial markets suggests that it will be more difficult for these countries to stabilize their economies in the face of capital inflows and outflows.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5814.

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Date of creation: Nov 1996
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Handle: RePEc:nbr:nberwo:5814

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  1. Sebastian Edwards & Mohsin S. Khan, 1986. "Interest Rate Determination in Developing Countries: A Conceptual Framework," NBER Working Papers 1531, National Bureau of Economic Research, Inc.
  2. Michael P. Dooley & Donald J. Mathieson, 1992. "Exchange rate policy, financial structure, and the transition from credit to monetary instruments," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  3. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-59, Nov.-Dec..
  4. Takatoshi Ito & Anne O. Krueger, 1994. "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3," NBER Books, National Bureau of Economic Research, Inc, number ito_94-1, October.
  5. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  6. Reisen, Helmut & Yeches, Helene, 1993. "Time-varying estimates on the openness of the capital account in Korea and Taiwan," Journal of Development Economics, Elsevier, vol. 41(2), pages 285-305, August.
  7. 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.
  8. Jeffrey A. Frankel, 1994. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," IMF Working Papers 94/159, International Monetary Fund.
  9. Stephen K. McNees, 1992. "A forward-looking monetary policy reaction function: continuity and change," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-13.
  10. Hamid Faruqee, 1992. "Dynamic Capital Mobility in Pacific Basin Developing Countries: Estimation and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 706-717, September.
  11. Jeffrey A. Frankel, 1992. "Liberalization of Korea's foreign exchange markets," Pacific Basin Working Paper Series 92-08, Federal Reserve Bank of San Francisco.
  12. Maloney, William F., 1997. "Testing capital account liberalization without forward rates Another look at Chile 1979-1982," Journal of Development Economics, Elsevier, vol. 52(1), pages 139-168, February.
  13. Haque, Nadeem U. & Montiel, Peter, 1991. "Capital mobility in developing countries: Some empirical tests," World Development, Elsevier, vol. 19(10), pages 1391-1398, October.
  14. Menzie Chinn & Michael Dooley, 1995. "Asia-Pacific Capital Markets: Measurement of Integration and the Implications for Economic Activity," NBER Working Papers 5280, National Bureau of Economic Research, Inc.
  15. Deborah J. Lindner, 1992. "Foreign exchange policy, monetary policy, and capital market liberalization in Korea," International Finance Discussion Papers 435, Board of Governors of the Federal Reserve System (U.S.).
  16. Hamid Faruqee, 1991. "Dynamic Capital Mobility in Pacific Basin Developing Countries - Estimation and Policy Implications," IMF Working Papers 91/115, International Monetary Fund.
  17. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Menzie D. Chinn, 1998. "Before the Fall: Were East Asian Currencies Overvalued?," NBER Working Papers 6491, National Bureau of Economic Research, Inc.
  2. Menzie David Chinn, 1997. "On the won and other East Asian currencies," Pacific Basin Working Paper Series 97-07, Federal Reserve Bank of San Francisco.
  3. Chinn, Menzie D. & Dooley, Michael P. & Shrestha, Sona, 1999. "Latin America and East Asia in the context of an insurance model of currency crises," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 659-681, August.
  4. Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, EconWPA.

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