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 capital flows of Korea during the last couple of decades to characterize three significant changes after the crisis. First, after the introduction of macroprudential policies, the bank external borrowing was curbed while the bank external lending started an increasing trend. Second, the resident’s outward portfolio investments outpaced foreign portfolio investments on domestic assets after the crisis. The net outflow is closely associated with changes in return differentials between domestic and foreign assets. Third, the continued current account surpluses were saved as private assets held abroad, while it was saved as FX reserves before the crisis. The precautionary role of reserves is now complemented by currency swap arrangements with major countries. Simple VAR results confirm the increased resilience of the bank’s foreign borrowing to external shocks, and the increased association of net portfolio inflows with the interest rate differential after the crisis.