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Capital Inflows and Exchange Rate Volatility in Korea

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  • Kyuil Chung

    (The Bank of Korea)

Abstract

High exchange rate volatility threatens international trade and exacerbates the currency mismatch problem, hence generating economic instability. However, low exchange rate volatility may cause another problem. Low volatility induces speculative capital inflows as speculative investors, who are usually concerned both with the interest rate differential and exchange rate risk, become concerned with the interest rate differential only. In this paper we use several techniques to identify the relationship between exchange rate volatility and capital inflows in Korea. First, estimation of a Markov switching model shows that all kind of capital inflows increase under low volatility regimes, while capital inflows with the exception of FDI all decrease under high volatility regimes. Second, estimation of a multivariate GARCH-in-Mean Model and the impulse response function derived from it provide evidence that lower exchange rate volatility tends to increase most types of capital inflows other than FDI. These results imply that a medium level of exchange rate volatility is most beneficial for economic stability

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  • Kyuil Chung, 2013. "Capital Inflows and Exchange Rate Volatility in Korea," 2013 Meeting Papers 890, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:890
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    References listed on IDEAS

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    Cited by:

    1. Zainab Jehan & Azooba Hamid, 2017. "Exchange rate volatility and capital inflows: role of financial development," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(3), pages 189-203, December.

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