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For Whom the Levy Tolls: The Case of a Macroprudential Stability Levy in South Korea

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  • JaeBin Ahn

    (Seoul National University)

  • Youngju Kim

    (Bank of Korea)

  • Hyunjoon Lim

    (Bank of Korea)

Abstract

Can capital flow management measures (CFMs) reduce external vulnerability of the economy? This paper studies the effectiveness of a macroprudential stability levy introduced in Korea, which was intended to curb foreign currency (FX) debt as well as to lengthen its maturity structure in the banking sector. Using the detailed bank-level balance sheet data, this study finds that the levy had limited effects on curbing non-core FX debt, while it substantially lengthened its maturity structure driven mainly by foreign bank branches’ interoffice account. The subsequent analysis employing the transaction-level loan rate data further suggests that it likely had unintended consequences favoring foreign bank branches that took advantage of regulatory arbitrage and therefore were able to take FX loan market share from domestic banks that could not avoid passing the levy onto their borrowers.

Suggested Citation

  • JaeBin Ahn & Youngju Kim & Hyunjoon Lim, 2022. "For Whom the Levy Tolls: The Case of a Macroprudential Stability Levy in South Korea," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(3), pages 520-559, September.
    • Handle: RePEc:pal:imfecr:v:70:y:2022:i:3:d:10.1057_s41308-022-00163-x
    DOI: 10.1057/s41308-022-00163-x
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    Cited by:

    1. Lee, Junyong & Lee, Kyounghun & Oh, Frederick Dongchuhl, 2023. "The effectiveness of capital controls and macroprudential measures," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 45(4), pages 1-22.

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    More about this item

    Keywords

    F31; F38; F42; G15; G21;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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