Capital Inflows and Policy Responses: Lessons from Korea's Experience
Capital Inflows and Policy Responses: Lessons from Korea's Experience
In response to a capital inflow surge from early 2000 through 2007, Korea adopted several policy measures. Of those measures, this chapter evaluates the effectiveness of the capital outflow liberalization and of the accumulation of foreign reserves. In order to neutralize the excess supply of foreign exchange, Korea lifted most of the restrictions on residents’ investments abroad. Korea also conducted smoothing operations in the foreign exchange market to mitigate the exchange rate volatility, and thereby built up its foreign reserves. However, it appeared that Korea's capital outflow liberalization eventually resulted in the increase of external debt and foreign reserves were used within a limited boundary because of “fear of losing reserves.” All these provide valuable lessons to other EMEs.
Keywords: Capital outflow liberalization, Currency hedging, Foreign reserves, Foreign exchange market intervention, Central bank swap, Korea
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