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Capital Inflows and Policy Responses: Lessons from Korea’s Experience

In: Volatile Capital Flows in Korea

Author

Listed:
  • Kyuil Chung
  • Seungwon Kim

Abstract

After the late 1990s Asian financial crisis, the main policy framework that Korea adopted combined a free-floating exchange rate system and inflation targeting, together with a widening of financial liberalization. The theoretical background behind this policy scheme was the famous so-called trilemma,1 which dictates that it is impossible to accomplish exchange rate stability, monetary policy independence, and free capital mobility simultaneously. Given the condition that financial markets in individual countries had been rapidly integrated into the international financial markets since the 1980s,2 it seemed that the free-floating exchange rate system and inflation targeting was the best option Korea could choose. Since then, Korean policymakers have maintained this policy framework and considered this their starting point for policymaking. Under the trilemma framework, of course, this has implied an acceptance of high capital mobility.

Suggested Citation

  • Kyuil Chung & Seungwon Kim, 2014. "Capital Inflows and Policy Responses: Lessons from Korea’s Experience," Palgrave Macmillan Books, in: Kyuil Chung & Soyoung Kim & Hail Park & Changho Choi & Hyun Song Shin (ed.), Volatile Capital Flows in Korea, chapter 5, pages 119-141, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-36876-8_5
    DOI: 10.1057/9781137368768_5
    as

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