International Reserves Management and Capital Mobility in a Volatile World: Policy Considerations and a Case Study of Korea

Joshua Aizenman, Yeonho Lee, Yeongseop Rhee

NBER Working Paper No. 10534
Issued in June 2004
NBER Program(s):   IFM   ITI

This paper characterizes the precautionary demand for international reserves driven by the attempt to reduce the incidence of costly output decline induced by sudden reversal of short-term capital flows. It validates the main predictions of the precautionary approach by investigating changes in the patterns of international reserves in Korea in the aftermath of the 1997-8 crisis. This crisis provides an interesting case study, especially because of the rapid rise in Korea's financial integration in the aftermath of the East-Asian crisis, where foreigners' shareholding has increased to 40% of total Korean market capitalization. We show that the crisis led to structural change in the hoarding of international reserves, and that the Korean monetary authority gives much greater attention to a broader notion of 'hot money,' inclusive of short-term debt and foreigners' shareholding.

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This paper was revised on November 18, 2005

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Document Object Identifier (DOI): 10.3386/w10534

Published: Aizenman, Joshua & Lee, Yeonho & Rhee, Youngseop, 2007. "International reserves management and capital mobility in a volatile world: Policy considerations and a case study of Korea," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 1-15, March. citation courtesy of

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