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


  • Menzie D. Chinn
  • William F. 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 of 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 EuroYen rate. These results contrast with those obtained by Reisen and Yches (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 integration 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.

Suggested Citation

  • Menzie D. Chinn & William F. Maloney, 1996. "Financial and Capital Account Liberalization in the Pacific Basin: Korea and Taiwan during the 1980's," NBER Working Papers 5814, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5814
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    References listed on IDEAS

    1. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-750, July.
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    5. 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.
    6. 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 443-467, May/June.
    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. 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.
    9. 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.
    10. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    11. International Monetary Fund, 1990. "Capital Mobility in Developing Countries; M386Some Empirical Tests," IMF Working Papers 90/117, International Monetary Fund.
    12. 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.).
    13. 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.
    14. 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, January.
    15. 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.
    16. 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.
    17. 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.
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    Cited by:

    1. Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, EconWPA.
    2. Chinn, Menzie D., 2000. "Before the fall: were East Asian currencies overvalued?," Emerging Markets Review, Elsevier, vol. 1(2), pages 101-126, September.
    3. Chinn, Menzie D, 1999. "On the Won and Other East Asian Currencies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 113-127, April.
    4. Chinn, Menzie D. & Dooley, Michael P. & Shrestha, Sona, 1999. "Latin America and East Asia in the context of an insurance model of currency crises," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 659-681, August.
    5. Menzie D. Chinn & Michael P. Dooley, 1997. "Asia Pacific Capital Markets: Integration and Implications for Economic Activity," NBER Chapters,in: Regionalism versus Multilateral Trade Arrangements, NBER-EASE Volume 6, pages 169-202 National Bureau of Economic Research, Inc.
    6. Chinn, Menzie David & Dooley, Michael P., 1999. "International monetary arrangements in the Asia-Pacific before and after," Journal of Asian Economics, Elsevier, vol. 10(3), pages 361-384.
    7. Menzie D. Chinn, 2002. "The Compatability of Capital COntrols and Financial Development: A Selective Survey and Empirical Evidence," Asia Pacific Economic Papers 327, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems


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