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.
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
International Reserves and Firm Investment: Identification through Bank Credit Reallocation
[Local File Updated, Aug 2025] submitted
Joint with Ju H. Pyun (Korea University Business School) and Youngjin Yun (Hanyang University)
A central bank’s accumulation of foreign reserves can reallocate domestic credit and influence investments among firms. Exploiting institutional features in Korea and connecting firms with their lending banks from 2004 to 2019, we examine how reserve accumulation and sterilization affect credit allocation and firm investment. We track the issuance of sterilization bonds by the central bank to finance reserve purchases and identify heterogeneous exposure across banks. Banks more responsive to sterilization absorb larger quantities of these bonds and adjust their loan accordingly. We find that firms—particularly those with higher liabilities to such banks—reduce investment during periods of reserve accumulation. The impact of reserve-induced credit reallocation on firm investment is centered primarily on non-listed firms, non-exporters, and firms with low productivity.
JEL classification codes: C23, E22, E58, F21, F31
Keywords: international reserves, sterilized intervention, firm investment, bank balance sheet, unconventional monetary policy
Exchange Rates and Structural Change
[Local File Updated, Feb 2024],
Joint with Ju H. Pyun (Korea University Business School) and Paul Bergin (UC Davis and NBER)
While macroeconomics tends to view exchange rate movements as transitory, this paper studies how persistent exchange rate realignments, arising from sustained capital flows or capital account policies, can impact longer run issues such as structural change and productivity growth. We provide empirical evidence that policies of reserve accumulation have had significant effects on the sectoral composition of output and also on industry structure, in terms of number of firms, product varieties, and sourcing of inputs in global production chains. We develop a dynamic twocountry model with two sectors, firm dynamics, and international asset trade, to show how exchange rate realignment can impact longer run growth prospects. Novel to our approach is consideration of changes in industrial structure -- firm creation, number of varieties, and what we term “capture of global supply chains” -- as aspects of structural change in addition to the usual consideration of sectoral reallocation and learning-by-doing. The model is used to explore implications of the mechanism for optimal capital account policy.
JEL classification codes: E58, F31, F41, O11
Keywords: capital account policy, foreign exchange reserves, capital control, firm delocation, Chinese economy
Stairway to Haven: Sovereign Debt and the Patterns of Capital Flows
[preliminary draft available upon request]
Joint with Wontae Han (Dankook University)
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 Misallocation, Currency Excess Returns, and Interest Rate Differentials
[preliminary draft available upon request]
This paper investigates the relationship between capital misallocation and currency excess return at a medium frequency. Previous wisdom predicts that currency excess return and the subsequent interest rate differential are associated with capital accumulations in an open economy. Capital misallocation, on the other hand, dampens the efficient utilization of the capital, thereby increasing currency excess returns and interest rate differentials. Total factor productivity de-growth, triggered by capital misallocation, plays a key role. Along with the revised rationale, we provide new stylized facts that highlight the association between the misallocation and currency return based on our novel dataset of 17 economies over the period from 2002 to 2018. Specifically, our empirical results consistently reveal that capital misallocation is positively associated with real currency excess returns and interest rate differentials.
JEL Classification: F30 F41 G00
Keywords: Currency excess returns; Capital accumulation; Capital misallocation; In- ternational capital flows
Capital Flows and Resource Reallocation: Quantitative Evidence 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 Seunghyeon Lee (Bank of Korea)
A Strategic Study on Cooperation with the Global South to Strengthen the Role of a Global Pivotal State: Regional Dynamics and Cooperation Agendas in the Global South (In Korean)
[Link] edited by Yool Kwon, National Research Council for Economics, Humanities and Social Sciences
KDI-Brookings
New Global Dynamics: Managing Economic Change in a Transforming World
: Strengthening the Global Financial Architecture
[Link] edited by Zia Qureshi and Daehee Jeong
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
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