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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. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
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  7. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  8. Reinhart, Carmen & Khan, Mohsin, 1995. "Capital Flows in the APEC Region," MPRA Paper 8200, University Library of Munich, Germany.
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