The Effectiveness of Korea's Capital Flow Management System and its Implications on Exchange Rate Policy. Issue 3 (31st December 2014)

• Record Type: Journal Article
• Authors: Lee, Jinsoo
• Is Part Of: Journal of international logistics and trade. Volume 12:Issue 3(2014)
• Page Start: 77
• Page End: 96
• Publication Date: 2014-12-31
• Subjects: macro-prudential measures -- limit for FX forward position -- tax on foreign investment in bonds -- bank levy on foreign currency liabilities; International trade -- Periodicals; Business logistics -- Periodicals; Commerce international -- Périodiques; Logistique (Organisation) -- Périodiques; Business logistics; International trade; Periodicals; 382.05
• DOI: 10.24006/jilt.2014.12.3.77
• Languages: English
• ISSNs: 1738-2122

Abstract

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.