본문 바로가기 주메뉴 바로가기
kiep logo

Contents

Citation

Citation
No Title

Article View

East Asian Economic Review Vol. 14, No. 2, 2010. pp. 111-135.

DOI https://dx.doi.org/10.11644/KIEP.JEAI.2010.14.2.220

Number of citation : 0

View
443

Download
127

crossmark images crossmark images
PDF PPT Twitter Facebook

What Makes International Capital Flows So Volatile?: Push vs. Pull Factors in the Case of Korea

Author

Tae-Joon Kim

Dongduk Women’s University;Konkuk University

tjkim@dongduk.ac.kr

Jai-Won Ryou

Konkuk University;SK Research Institute for SUPEX Management

govjai@konkuk.ac.kr
Creative Commons Attribution License

EAER is an open access journal distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license.

Abstract

This paper analyzes the determinants of financial capital flows in Korea, which provides an intriguing case for examining the volatility of such flows as an almost fully opened capital market. Our empirical analysis finds both pull and push factors have significantly affected all three types of foreign capital flows- foreign equity investment, foreign bond investment and foreign other-type investment- in Korea, though the relative importance of each factor varies by sample period and type of financial capital. First, the determinants of capital inflows changed substantially following the 1997 currency crisis. The impact of push factors on foreign investment strengthened, rendering the Korean stock and bond market more susceptible to external shocks. Second, the global financial crisis, which increased global financial instability and preference for safe assets, appears to have had a negative effect on other-type investment. However, fThis paper analyzes the determinants of financial capital flows in Korea, which provides an intriguing case for examining the volatility of such flows as an almost fully opened capital market. Our empirical analysis finds both pull and push factors have significantly affected all three types of foreign capital flows- foreign equity investment, foreign bond investment and foreign other-type investment- in Korea, though the relative importance of each factor varies by sample period and type of financial capital. First, the determinants of capital inflows changed substantially following the 1997 currency crisis. The impact of push factors on foreign investment strengthened, rendering the Korean stock and bond market more susceptible to external shocks. Second, the global financial crisis, which increased global financial instability and preference for safe assets, appears to have had a negative effect on other-type investment. However, foreign equity investment showed a quick recovery in the wake of global financial crisis. Third, the effects of capital account liberalization on capital flows appear more complicated than expected. Korea’s opening up of the stock market to foreign investors in 1992 did not usher in foreign equity investment. The liberalization of foreign portfolio investment after the 1997 crisis produced a significant effect on equity, but not on bond investment. Still, how to stabilize capital flows amid more deeply integrated domestic and foreign financial markets is another matter.

JEL classification: F31, F32, F36

Keywords

Cross-border Capital Flows, Pull and Push Factors, Capital Account Liberalization

Language

English

References

  1. Abdullah, Muhammad Asraf, Shazali Abu Mansor and Chin-Hong Puah. 2010. "Determinants of International Capital Flows, The Case of Malaysia." Global Economy and Finance journal, vol. 3, no. 1, pp. 31-43.
  2. Alfaro, Laura, Sebnem Kalemli-Ozcan and Vadym Volosovych. 2005. "Capital Flows in a Globalized World: The Role of Policies and Institutions." NBER Working Paper 11696.
  3. Allen, Franklin and Douglas Gale. 2000. Comparing Financial Systems. The MIT Press.
  4. Calvo, Guillermo, Leonardo Leiderman, and Carmen Reinhart.1996. "Inflows of Capital to Developing Countries in the 1990s." journal of Economic Perspectives, vol. 10, no. 2, pp. 123-139. CrossRef
  5. Cooper, Richard N. 1994. "Korea’s Balance of International Payments" in S. Haggard et al. eds. Macroeconomic Policy and Adjustment in Korea, 1970-1990. Harvard Institute for International Development and Korea Development Institute.
  6. Diamond, D. 1984. "Financial Intermediation and Delegated Monitoring." Review of Economic Studies, vol. 51, pp. 393-414 CrossRef
  7. Eichengreen, Barry and Albert Fishlow. 1998. "Contending with Capital Flows: What Is Different about the 1990s?" in Miles Kahler ed. Capital Flows and Financial Crises. Cornell University Press.
  8. Henry, Peter Blair. 2007. "Capital Account Liberalization, Theory, Evidence, and Speculation." journal of Economic Literature, vol. 45, pp. 887-935. CrossRef
  9. Kawai, Masahiro and Shinji Takagi. 2008. "A Survey of the Literature on Managing Capital Inflows." ADB Institute Discussion Paper no. 100.
  10. Kim, Suk-Joong and Vince Hooper. 2007. "The Determinants of Capital Inflows: Does the opacity of recipient country explain the flows?" Economic Systems, vol. 31, no. 1, pp. 35-48. CrossRef
  11. Kim, Soyoung and Doo Yong Yang. 2008. "Managing Capital Flows: The Case of the Republic of Korea." Discussion Paper no. 88. ADB Institute.
  12. Kirabaeva, Koralai and Assaf Razin. 2009. "Composition of International Capital Flows: A Survey." NBER Working Paper 15599.
  13. Lee, Ki-Seong and Jai-Won Ryou. 2006. "Analysis of Interrelationship between domestic and foreign financial markets after the 1997 currency crisis." (in Korean) Korean journal of Money & Finance, vol. 11, no.1, pp. 159-183.
  14. Mandilaras, Alex and Helen Popper. 2009. "Capital Flows, Capitalization, and Openness in Emerging East Asian Economies." Review of International Economics, vol. 17, no. 4, pp. 734-750. CrossRef
  15. McCulloch, Rachel and Peter Petri. 1998. "Equity Financing of East Asian Development" in Miles Kahler ed. Capital Flows and Financial Crises. Cornell University Press.
  16. Neumann, Rebecca, Ron Penl and Altin Tanku. 2009. "Volatility of Capital Flows and Financial Liberalization: Do Specific Flows Respond Differently?" International Review of Economics and Finance, vol. 18, pp. 488-501. CrossRef
  17. Park, Won-am. 1996. "Financial Liberalization: The Korean Experience" in Takatoshi Ito and Anne O. Krueger eds. Financial Deregulation and Integration in East Asia. NBER, The University of Chicago Press.
  18. Ryou, Jai-Won and Tae-Joon Kim. 2002. "The Stock Market and Macroeconomic Policy in Emerging Market Economies, The Case of Korea." Korean Social Science journal, vol. 29, no.1, pp. 75-106.
  19. Taylor, Mark and Lucio Sarno. 1997. "Capital Flows to Developing Countries: Long and Short-Term Determinants." The World Bank Economic Review, vol. 11, no. 3, pp. 451-470. CrossRef
  20. Tesar, Linda. 1999. "The Role of Equity in International Capital Flows." in Martin Feldstein ed. International Capital Flows. NBER, University of Chicago.
  21. Won, Seung Yeon and Sangyong Joo. 2009. "A Study on the Determinants of Foreigner’s Domestic Bond Investment and Their Impacts on the Korean Bond Market." (in Korean) Kyong Je Hak Yon Gu, vol. 57, no. 3, pp. 31-65.
  22. Yang, Doo Yong. 2006. ed. Emerging Financial Risks in East Asia. KIEP and PRI.