Impact of FX-Related Macroprudential Measures in Korea: An Assessment

Abstract

In the periods leading to and during the global financial crisis, Korea experienced surges and reversals in capital flows on an unprecendented scale. The costs of these volatile capital flows were brought to light when about 50 billion dollars of portfolio and other investments—amounting to 5.2 percent of nominal gross domestic product (GDP) in 2008—flowed out of the financial system in the three months following the Lehman Brothers failure in September 2008, pushing the Korean economy close to another currency crisis. A main factor driving the excessive volatility of capital flows over this period was the procyclical fluctuations in cross-border capital flows through the banking sector, especially short-term noncore foreign exchange (FX) liabilities.1 In recognition of these vulnerabilities, Korea has introduced a new set of macroprudential policy measures since 2010 aimed at mitigating the procyclicality of cross-border capital flows through banks.KeywordsGross Domestic ProductBanking SectorForecast HorizonPolicy ScenarioDomestic BankThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.