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Spot and foward market intervention during the 1997 Korean currency crisis

Author

Listed:
  • Woosik Moon

    (Seoul National University, School of International and Area Studies, Seoul (Korea))

  • Yeongseop Rhee

    (Sookmyung University, Department of Economics, Seoul (Korea))

Abstract

This study shows that, among the two crisis periods of 1997, January-March and September-November, the spot market interventions were effective in stabilizing the Korean currency in the first period, whereas there is no evidence that the forward market interventions were effective in either of these two periods. If anything, the forward market interventions resulted in a destabilization of the exchange rate. This result may be due to excessive use of forward market interven-tions from 20th October, when the forward premium tended to show amplifying movement. Although it was clear that the Korean won was no longer defendable by forward market interventions, the Korean monetary authorities intervened in vain to defend the Korean currency. The forward market intervention seemed to be heavily used because the BOK believed its efficacy of a bear squeeze and wanted to camouflage the drain in foreign reserves. However, wasting foreign reserves in this operation proved too costIy for the BOK and the Korean economy. The result of this study suggests that, only when forward premiums are maintained within some margin, forward market interventions may be an effective instrument for stabilizing the foreign exchange market; otherwise it can create unwanted results, precipitating only the collapse of the exchange rate and aggravating the drain of foreign reserves, especially in a crisis period.

Suggested Citation

  • Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
    • Handle: RePEc:psl:bnlqrr:2006:32
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    File URL: http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9869/9751
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    References listed on IDEAS

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    Cited by:

    1. Martin Vesna, 2020. "Intervention Strategies in Foreign Exchange Market," Economic Themes, Sciendo, vol. 58(3), pages 381-399, September.

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    More about this item

    Keywords

    Crisis; Currency Crisis;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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