The Effectiveness of Korea's Capital Flow Management System and its Implications on Exchange Rate Policy

Abstract

This paper examines the effectiveness of the three macro-prudential measures introduced by the Korean government in 2010 and 2011: (i) introduction of limit for FX forward positions of domestic banks and foreign bank branches, (ii) reintroduction of tax on foreign investors' earnings from Korean government bonds, and (iii) imposition of macro-prudential stability levy on non-deposit foreign currency liabilities appeared in bank balance sheets. The results show that the three measures were not successful: The limits of FX forward position did not lead to the decrease in foreign borrowings. The reintroduction of the tax did not reduce foreign investments in Korean government bonds. Lastly, the levy on non-deposit foreign currency liabilities did not lower the foreign borrowings from the banks and did not result in more financing through deposits for banks. The ineffectiveness of the capital flow management system in controling the amount of foreign capital flows implies that the system might not be effective in mitigating the pressure on exchange rate caused by excessive volatility of foreign capital flows.

Citation

Lee, J. (2014), "The Effectiveness of Korea's Capital Flow Management System and its Implications on Exchange Rate Policy", Journal of International Logistics and Trade, Vol. 12 No. 3, pp. 77-96. https://doi.org/10.24006/jilt.2014.12.3.77