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

  • Menzie Chinn
  • William Maloney

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 fo 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 Euro Yen rate. These results contrast with those obtained by Reisen and Yeches (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 integraton 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. [F32,F34]

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Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 12 (1998)
Issue (Month): 1 ()
Pages: 53-74

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Handle: RePEc:taf:intecj:v:12:y:1998:i:1:p:53-74
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  1. 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.
  2. Jeffrey A. Frankel, 1997. "Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)?," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 263-285, December.
  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. 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.
  5. International Monetary Fund, 1990. "Capital Mobility in Developing Countries: M386Some Empirical Tests," IMF Working Papers 90/117, International Monetary Fund.
  6. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework," NBER Working Papers 1531, National Bureau of Economic Research, Inc.
  7. Jeffrey A. Frankel, 1992. "Liberalization of Korea's foreign exchange markets," Pacific Basin Working Paper Series 92-08, Federal Reserve Bank of San Francisco.
  8. 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.
  9. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  10. Sun Bae Kim, 1993. "Do capital controls affect the response of investment to saving? evidence from the Pacific Basin," Economic Review, Federal Reserve Bank of San Francisco, pages 23-39.
  11. 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.
  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. 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.
  14. 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.
  15. 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.
  16. 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, July.
  17. 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.).
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