Post-crisis changes in the pattern of capital flows - The case of Korea

This paper investigates pattern changes in international capital flows after the Global Financial Crisis using the Korean case. It follows different types of capital flows into Korea during the last couple of decades in relation with policy reforms, and documents three significant pattern changes. First, banks' external borrowing was curbed while external lending started an increasing trend after the introduction of currency-based macroprudential policies. Second, residents' outward portfolio investments increased significantly outpacing incoming foreign portfolio investments. The outflow is closely associated with return differentials between domestic and foreign assets. Third, reserve accumulation slowed down, and its precautionary role is supplemented by central bank swap lines. Current account surplus continued, but the surpluses were saved in various forms of public/private assets, not just in reserves alone. Regarding these findings, I implement a simple VAR analysis to confirm (1) the increased resilience of the bank foreign borrowing to the VIX shocks, (2) the increased association of outward portfolio investment with the interest rate differential, and (3) the increased negative response of outward portfolio investment to the VIX shocks.