International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea

Joshua Aizenman, Yeonho Lee and Yeongseop Rhee

Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz

Abstract: This paper characterizes the precautionary demand for international reserves driven by the attempt to reduce the incidence of costly output decline induced by sudden reversal of short-term capital flows. It validates the main predictions of the precautionary approach by investigating changes in the patterns of international reserves in Korea in the aftermath of the 1997-8 crisis. This crisis provides an interesting case study, especially because of the rapid rise in Korea’s financial integration in the aftermath of the East- Asian crisis, where foreigners’ shareholding has increased to 40% of total Korean market capitalization. We show that the crisis led to structural change in the hoarding of international reserves, and that the Korean monetary authority gives much greater attention to a broader notion of ‘hot money,’ inclusive of short-term debt and foreigners’ shareholding.

Keywords: short-term capital flows; foreigners’ shareholding; precautionary demand for international reserves (search for similar items in EconPapers)
Date: 2004-05-01
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Citations: View citations in EconPapers (25)

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