Research
Publication
Catching Up by ‘Deglobalizing’: Capital Account Policy and Economic Growth
Journal of International Money and Finance, 2023, 102920
[Link to the Journal Article] [Link to NBER Working Papers] [NBER Digest No.4 April 2023]
Joint with Ju H. Pyun (Korea University Business School) and Paul Bergin (UC Davis and NBER)
While substantial empirical research has evaluated the question of whether capital account openness promotes economic growth, this paper finds empirical evidence for cases where the opposite is true―that a policy of capital controls can promote economic growth, when combined with a policy of reserve accumulation. Using panel data from 45 countries from 1985–2014, we find that capital controls combined with reserve accumulation—strategic capital account policy—contribute to growth in real GDP and TFP. We show that the policy is strongly associated with enlarging the scale of the manufacturing sector and productivity, and is consistent with theories of learning by doing through exporting.
JEL classification codes: C23, E58, F21, F31, F41
Keywords: foreign exchange reserves, capital controls, emerging economies, resource reallocation, dynamic panel estimation
Precaution Versus Mercantilism: Reserve Accumulation, Capital Controls, and the Real Exchange Rate
Journal of International Economics, 2022, 139
[Local File Updated, Sept 2022] [Link to the Journal Article] [Link to NBER Working Papers] [Link to CEPR Discussion Papers]
[Link to GRU Working Papers] [Vox Article] [Online Appendix]
Joint with Alan M. Taylor (UC Davis, NBER, and CEPR)
We document a new international stylized fact describing the relationship between real exchange rates and external asset holdings. Economists have long argued that the real exchange rate is associated with the net international investment position, appreciating as external wealth increases. This mechanism has been seen as central for international payments equilibrium and relative price adjustments. However, we argue that the effect of external assets held by the public sector—reserve accumulation—on real exchange rates may be quite different from that of privately held external assets, and that capital controls are a critical factor behind this difference. For 1975–2007 we find that increases in external assets relative to GDP (net of reserves) are associated with real exchange rate appreciation. However, increases in reserves relative to GDP are associated with depreciation, if combined with high capital controls. We also find that reserve accumulation is associated with a larger trade surplus, along with higher GDP and TFP growth in countries with high capital controls. Gross, rather than net, positions matter. We present a theoretical model to account for the stylized facts. The framework encompasses so-called precautionary and mercantilist motives for reserve accumulation, and also explains how the optimal capital account policy—the mix of reserve accumulation and capital controls—is determined.
JEL classification codes: F31, F38, F41, F43, O24.
Keywords: capital controls, economic growth, financial crises, international reserves, real exchange rates, trade.
Other Publication
Capital Flows and the Fiscal Multiplier: Evidence from the Sign Restriction VAR
Kukje Kyungje Yongu, 2023, 29(3)
[Local File Updated, Sept 2023]
We examine the effects of fiscal expenditures in an open economy where capital inflows and outflows occur. The expansion of demand through an increase in fiscal expenditures have different effects depending on how the fiscal revenue is financed. Utilizing a panel data of 42 countries with a structural vector auto regression (SVAR) model and the sign restriction, we document that the effect of government expenditure on GDP is larger when there is net external capital inflows. Also we show that this fiscal multiplier is most notable with investment, while it is rather muted with consumption. JEL classification codes: E622, F30, F41
Keywords: Fiscal Policy, Fiscal Multiplier, Government Spending, Small-Open Economy Model
Service Matters; Capital Misallocation and Sectoral Economic Growth,
KDI Journal of Economic Policy, 2023, 45(1)
[Local File Updated, Sept 2022]
Joint with Woo Jin Roh (KDI)
Growth of the Korean Economy has been sluggish, and it is more pronounced in the service sector. We argue that capital misallocation, especially in the service sector, could attribute to this slowdown. Utilizing firm and sectoral level data, we first assess the rising dispersion of the marginal revenue product of capital (MRPK) driven by the service sector. This could represent a widening misallocation of capital. Furthermore, panel regression shows that within sector misallocations at the sectoral level are closely correlated with lower growth rate of sectoral real value added. Again, this is mainly observed in the service sector, but not in the manufacturing sector. Misallocations of other resources, labor and the intermediate input do not stand out.
JEL classification codes: D24, O40, O41, O49
Keywords: Resource Misallocation, Firm-Level Data, Sectoral Growth
Effect of US Monetary Policy on Gross Capital Flows: Cases in Korea
KDI Journal of Economic Policy, 2020, 42(4)
[Local File Updated, June 2020] [Journal Article]
U.S. monetary policy has been claimed to generate global spillovers and destabilize other small open economies. We analyze the effects of the identified U.S. monetary shocks on gross capital flows of Korean economy using local projection method. Consistent with previous results on other small open economies, we first confirm that U.S. interest rate hikes are dynamically correlated with foreign outflows and residents’ inflows. That is, not only it is correlated with the withdrawals of foreigners, but it is also correlated with those of domestic(Korean) investors. Results are mostly driven by the portfolio flows. Second, however, the marginal response to the U.S. monetary policy shock has been subdued if focus on the sample periods after the Global Financial Crisis. We conjecture a possible reason behind the change, an institutional change regarding the financial friction. If degree of pledgeability on the value of net worth increases, marginal response of both investors would drop with the U.S. monetary policy shock, consistent with our findings.
JEL classification codes: F32, F41, F42, E5
Keywords: U.S. monetary policy spillovers, gross capital flows, local projections, financial frictions
Working Paper
Firm Investment and Bank Credit Reallocation Channel of International Reserves: Evidence from Matched Bank–Firm Data
[Local File Updated, June 2021] [Link to GRU Working Paper]
Joint with Ju H. Pyun (Korea University Business School) and Youngjin Yun (Inha University)
We examine whether public capital outflows driven by the central bank–reserve accumulation–affect firm investment through bank credit reallocation. Incorporating non-financial firms data in Korea matched with their main banks for 2003-2017, we as- sess whether and how corporate investments are affected by changes in international reserves. We show that firm investment is negatively associated with international re- serves. Then by tracing the instruments for reserve accumulation, public bonds issued for the sterilization in the bank balance sheet, we show that a firm reduces investment when her main bank increases public bond holdings. A massive increase of supply of the sterilization bonds shifts banks’ balance sheet composition heterogeneously, and adversely affects investments for financially constrained or non-listed firms.
JEL classification codes: C23, E22, E58, F21, F31
Keywords: foreign exchange reserves, unconventional monetary policy, exchange rate policy, firm investment, bank balance sheet, sterilized intervention
Selected Work In Progress
Capital Account Policy, Firm-Dynamics, and Export-led Growth
[Local File Updated, Sept 2022],
Joint with Ju H. Pyun (Korea University Business School) and Paul Bergin (UC Davis and NBER)
The growth of manufacturing in China and other Asian economies has spurred interest in capital account policy as growth policy. This paper proposes a mechanism through which reserve accumulation and capital controls may promote manufacturing in a country while fostering premature de-industrialization in others. Focusing on firm delocation and the extensive margin of trade, this mechanism complements, but is distinct from learning-by-doing. One prediction is that a sustained current account surplus promotes agglomeration in manufacturing through the redirection of inputs in production chains. We also provide empirical evidence supporting this mechanism, linking capital controls and reserve accumulation to manufacturing labor productivity, firm entry, and the domestic share of intermediates.
JEL classification codes: C23, E58, F21, F31, F41
Keywords: currency undervaluation, foreign exchange reserves, capital control, emerging economies, firm delocation
Stairway to Haven: Sovereign Debt and the Patterns of Capital Flows
[preliminary draft available upon request]
Volatile capital flows and exchange rate fluctuations triggered by global risks have been recurrent events for emerging economies. In this paper, we take an episode of Korea, and investigate patterns of exchange rates and capital flows. We claim that, as the economy has evolved from an emerging to advanced, its currency fluctuations and capital flows have become more resilient to the external risks and overall economy gets closer to feature safe haven characteristics. Utilizing an augmented UIP framework with the data from 2003 to 2021, we first show the elasticity to nominal exchange rates by the global risk factor (VIX) significantly alleviated in recent years. Also, while the global risk generates capital outflows by non-residents, the magnitude has been decreased. We further argue that sovereign debt flows by the non-residents have played a critical role. That is, sovereign debt have became far much less responsive to the global risks, and capital flows net of sovereign flows do not feature the aforementioned patterns.
JEL classification codes: F30, F31, F41
Keywords: global risk, VIX, capital flows, exchange rates, Korean economy
Capital Flows and Resource Reallocation: Quantitative Evidences from the International Firm-Level Data
Joint with Ilhan Guner (University of Kent)
Fiscal Crowding out : Evidence from Matched Bank–Firm Data
Joint with Hyungseok Joo (University of Surrey) and Junhyong Kim (KDI)
Policy Works / Articles in KDI Publications
KDI-Brookings
New Global Dynamics: Managing Economic Change in a Transforming World
: Strengthening the Global Financial Architecture
Joint with Joon-Ho Hahm (Yonsei University)
Sovereign Bond Market and the Policy: Foreign Demand and the Safe Haven Currency
Policy Study, forthcoming
KDI-World Bank Group
Innovative Korea Leveraging Innovation and Technology for Development
: Leveraging Global Integration and International Trade
[Link] edited by Hoon Sahib Soh, Youngsun Koh, and Anwar Aridi, 2023
The Effect of External Uncertainty on Exchange Rates and Capital Flows (In Korean)
[youtube clip] [Link] KDI Economic Outlook, 2022, 39(1): 51--60
Fiscal Multiplier in Open Economies: Capital Accounts and Crowding out (In Korean)
[Link] Policy Study, 2021
External Capital Accounts and Macroeconomics: Capital Flows and Aggregate Productivity (In Korean)
[Link] Policy Study, 2020
Effects of External Shocks on Emerging Economies: US Monetary Policy and Gross Capital Flows (In Korean )
[Link] Policy Study, 2019
Commentary on Terms of Reference G20 Eminent Persons Group (In Korean)
Policy Report, Ministry of Economy and Finance (MOEF), 2019
Reserve Accumulation and Investment: Evidence from Korean Firm Level Data (In Korean)
[Link] Policy Study, 2018
The Effect of US Monetary Policy on Foreign Capital Flows (In Korean)
[youtube clip] [Link] KDI Economic Outlook, 2018, 35(1): 45--52
Discussion
Liability Dollarization and Exchange Rate Pass-Through by Junhyong Kim and Annie Soyean Lee
[Local file] NBER EASE 2023
Deviation in Real Exchange Rate Levels in OECD Countries and Their Strutural Determinants by Martin Berka and Daan Steenkamp
[Local file] NBER EASE 2023