Hail Park

Mitigating Systemic Spillovers from Currency Hedging

Korea has been a forerunner in incorporating macroprudential policies to mitigate the vulnerabilities from currency crises that can turn into a more generalised liquidity crisis. This paper examines longer-term design issues for a more resilient and stable financial system that could be expected to complement the existing macroprudential measures in achieving a more stable financial system. In particular, the paper examines the rationale and mechanics of a new public financial institution, provisionally called the Exchange Stabilisation and Guarantee Corporation (ESGC) whose main role is to buy dollar forward positions from Korean exporting companies who wish to hedge the currency exposure from long-term export orders. The ESGC is intended to mitigate the risks arising from the reliance on the role of the banking sector in providing currency hedging services to exporters. Rapid growth of short-term foreign currency denominated debt has been the result of banks receiving forward dollar sales by exporters, and then hedging the long dollar position by borrowing short in dollars. A public institution that can buy dollars forward, but which is designed so that there is no need to hedge by taking short dollar debt, can mitigate the rapid increase in short-term dollar debt in booms.

FX Funding Risks and Exchange Rate Volatility-Korea's Case

This paper examines how exchange rate volatility and Korean banks’ foreign exchange liquidity mismatches interacted with each other during the Global Financial Crisis, and whether the vulnerability stemming from this interaction has been reduced since then. Structural and cyclical changes after the crisis, including decreasing demand for currency hedges and the diversifying investor base for bonds, point to a possible weakening of the interaction mechanism; and we find evidences are strongly supportive of this.

The Effects of Global Liquidity on Global Imbalances

This paper examines whether global liquidity has effects on global imbalances. To this end, we estimate Panel-VARX models using data from the G5 (United States, United Kingdom, Euro area, Japan, and Canada) and 20 emerging countries. The empirical results show that the effects on global imbalances of global liquidity, especially the US monetary aggregate, are significant. The foreign exchange reserves of emerging economies are also found to play a significant role related to global imbalances.

Mapping Korea's International Linkages Using Generalised Connectedness Measures

Korea is a textbook example of a small open economy which is susceptible to conditions overseas but cannot affect them itself. Policymakers in Korea would therefore naturally benefit from an enriched understanding of the connections that exist between the Korean and global economies. We provide a detailed summary of these linkages using the generalised connectedness methodology introduced by Greenwood-Nimmo, Nguyen and Shin (2013b). Among our principal findings is the observation that domestic conditions are only generally important in the short to medium term, with overseas conditions exerting a dominant influence on Korea’s economic prospects in the long run. The economies which exert the strongest effect on Korea are the US, Europe, China and the ASEAN group, with a considerable role also played by global energy markets. Furthermore, we find that the ongoing global financial crisis is associated with greater connectedness of the Korean economy with advanced economies and its reduced connectedness with emerging economies.

The Effects of Oil Price on the Korean Economy: A Global VAR Approach

ABSTRACT This article empirically explores the effects of oil price on the Korean economy using a Global VAR model. First, we evaluate the average connectedness of oil price with the Korean domestic variables over the precrisis period. We then investigate the time-varying contribution of oil price to the Korean financial and real sectors during and after the global financial crisis through recursive estimation. It is found that the contribution of oil price becomes very large in the case of real exports, equity prices, and real output, but plays a much less prevalent role in the remaining cases. In the meantime, the time-varying contribution of oil price to the Korean economy has not changed during and after the global financial crisis. Interestingly, we find that the Korean economy is affected mostly by overseas financial conditions in the short-term but it becomes more susceptible to oil price fluctuations in the long run, suggesting that Korea’s reliance on energy imports leaves the economy exposed to volatility in energy prices.

The Spillover Effects of U.S. Monetary Policy on Emerging Market Economies: Breaks, Asymmetries and Fundamentals

The recent implementation of unconventional monetary policies in advanced economies and the preparations for an eventual return to normalization have renewed the interest in spillover effects of monetary policy on emerging market economies. This paper estimates a series of VAR-X models for a set of 10 emerging economies, that is, VARs in which U.S. policy enters exogenously. The contribution of this paper is (1) to use an identified shock component of the U.S. (shadow) Federal Funds rate as a consistent policy instrument for conventional and unconventional policies, (2) to account for changes in the transmission of U.S. monetary policy over time, (3) to quantify asymmetries in the transmission of tightening and easing shocks, and (4) to relate the exposure of emerging countries with macroeconomic fundamentals. The results point to substantially nonlinear and asymmetric spillover effects, which pose challenges to policymakers.

Stock Market Co-Movement and Exchange Rate Flexibility: Experience of the Republic of Korea

This paper argues that for countries where equity investments dominate cross-border capital flows, the proper framework for analyzing the role of a flexible exchange rate system as a buffer against external shocks is the uncovered stock return parity condition, rather than the uncovered interest parity condition. Estimation of the stock return parity condition shows that it fails to hold in the Republic of Korea largely because of co-movement in the Republic of Korea and United States stock markets. Three global factors are largely responsible for the co-movement: global financial integration, which may be generating a global financial cycle; acceptance of insensitivity of exchange risk by global equity investors; and domestic investors imitating the trading behavior of foreign equity investors.

Overview of International Capital Flows

The purpose of this book is to explore how Korea has managed international capital flows over the last two decades. Unfortunately, less than ten years after Korea had barely recovered from the aftermath of the 1997 Asian financial crisis, the country was hit by yet another crisis, the global financial crisis. There were many causes for these two crises, but international capital flows were prime among them. Therefore, a good understanding of capital flows in and out of Korea during the last two decades is essential to derive some useful lessons from Korea’s experiences. However, before exploring capital flows in Korea, we first provide an overview of international capital flows in general in order to place the Korean case in a broader context.

Capital Flows in Korea after Capital Account Liberalization

It is conventional wisdom that foreign capital inflows have a positive role in promoting economic growth and facilitating financial development in emerging markets that traditionally experience shortages of capital. Should the capital introduced abruptly flow out of a country, however, it delivers a great shock to that country’s economy. This has been well illustrated by the Asian financial crisis of the late 1990s and the global financial crisis in 2008.