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Macroeconomic Effects of Capital Account Liberalization: the Case of Korea

  • Soyoung Kim
  • Sunghyun Henry Kim
  • Yunjong Wang

The macroeconomic effects of capital account liberalization in Korea are examined. Simple data analysis suggests that capital account liberalization substantially changed the nature and composition of capital flows. Based on the VAR model, the authors find the following stylized facts. First, after capital market liberalization, capital flows become less driven by current account imbalances and therefore become more autonomous. Second, capital account liberalization significantly changes the effects of capital flows on macroeconomic variables. Third, capital account liberalization is highly related to consumption and investment booms, and subsequent appreciation of nominal and real exchange rates, which leads to the current account worsening. Finally, there is strong evidence of sterilized foreign exchange market intervention in response to capital inflows. Copyright Blackwell Publishing Ltd 2004..

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Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 8 (2004)
Issue (Month): 4 (November)
Pages: 624-639

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Handle: RePEc:bla:rdevec:v:8:y:2004:i:4:p:624-639
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  1. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America; The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
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  7. Fischer, S. & Cooper, R.N. & Dornbusch, R. & Garber, P.M. & Massad, C. & Polak, J.J. & Rodrik, D. & Tarapore, S.S., 1998. "Should the IMF Pursue Capital-Account Convertibility?," Princeton Essays in International Economics 207, International Economics Section, Departement of Economics Princeton University,.
  8. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
  9. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  10. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "Af1uencia de capital y apreciacion del tipo de cambio real en America Latina: E1 papel de los factores externos
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  11. Angelos A. Antzoulatos, 1996. "Capital flows & current account deficits in the 1990s: why did Latin America & East Asian countries respond differently?," Research Paper 9610, Federal Reserve Bank of New York.
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