The Macroprudential Measures’ Effects on the Korean Foreign Exchange Market
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Although capital market openness is a virtue to pursue, there are many reasons to control capital flows. Korean monetary authorities employed macroprudential measures after the global financial crisis (GFC). They intend to avoid the considerable accumulation of foreign capital inflows, which potentially causes a financial crisis in an economic downturn. Korean macroprudential measures enlengthened the maturity of foreign currency debts. This paper analyzes whether the macroprudential measures limit the supply of USD enough to change the price variables. The macroprudential measures did not cause the depreciation of the Korean won, and the Korean won’s sensitivity to market volatility did not rise either. Although the cost of USD funding increased after the macroprudential measures, the F/X exchange rates did not seem to react. The interest rate arbitrage opportunity did not increase after implementing macroprudential measures. Because the investors have not fully explored the interest arbitrage opportunity, the increased USD funding cost of macroprudential measures did not show up as the increased gap between the Korean won bond interest rate and cross-currency rate. Korean monetary authorities introduced the macroprudential measure when capital inflows resumed after the GFC. The increased cost of USD funding did not reverse the capital inflows trend, only restructuring them.
Abstract
Although capital market openness is a virtue to pursue, there are many reasons to control capital flows. Korean monetary authorities employed macroprudential measures after the global financial crisis (GFC). They intend to avoid the considerable accumulation of foreign capital inflows, which potentially causes a financial crisis in an economic downturn. Korean macroprudential measures enlengthened the maturity of foreign currency debts. This paper analyzes whether the macroprudential measures limit the supply of USD enough to change the price variables. The macroprudential measures did not cause the depreciation of the Korean won, and the Korean won’s sensitivity to market volatility did not rise either. Although the cost of USD funding increased after the macroprudential measures, the F/X exchange rates did not seem to react. The interest rate arbitrage opportunity did not increase after implementing macroprudential measures. Because the investors have not fully explored the interest arbitrage opportunity, the increased USD funding cost of macroprudential measures did not show up as the increased gap between the Korean won bond interest rate and cross-currency rate. Korean monetary authorities introduced the macroprudential measure when capital inflows resumed after the GFC. The increased cost of USD funding did not reverse the capital inflows trend, only restructuring them.
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