Globalization of Capital Markets and Monetary Policy Independence in Korea

Abstract

This paper empirically examines whether Korean monetary policy is independent of U.S. monetary policy during the post-crisis period in which capital account is liberalized and floating exchange rate regime is adopted and during the pre-crisis period in which capital mobility is restricted and tightly managed exchange rate regime is adopted. Before capital account liberalization, monetary autonomy can be achieved in view of the trillema, even under tightly managed exchange rate regime, as capital mobility is restricted. On the other hand, for the period after capital account liberalization, monetary autonomy can be also achieved in view of the trillema, as exchange rate stability is given up. Securing monetary autonomy, however, may not be easy under liberalized capital account for a small open economy like Korea. Huge capital movements can generate excessive instability in foreign exchange and asset markets. Strengthened international economic linkages may also be another factor to prevent monetary policy from being independent. Using block-exogenous structural VAR model, the effects of U.S. monetary policy shocks on Korean economy are examined. Empirical results show that Korean monetary policy is not independent of U.S. monetary policy for both periods before and after capital account liberalization. For the period after capital account liberalization, Korea does not seem to have implemented floating exchange rate policy in practice, which may lead Korean monetary policy to be dependent on U.S. monetary policy. For the period after capital account liberalization, portfolio flows respond dramatically to the U.S. monetary policy, which may also keep Korean monetary policy from being independent. 본 논문은 한국이 1997년 외환위기 이 후 변동환율제 도입과 더불어 자본자유화 로 자본시장이 글로벌화된 상황에서 외부 로부터 독립적인 통화정책을 유지할 수 있었는지를 자본자유화 이전 기간과 비교 하여 분석했다. 트릴레마 이론에 비추어보 면, 자본자유화 이전에는 환율시장에 적극 적으로 개입을 해도 이론적으로 독립적인 통화정책을 유지할 수 있는 여지가 있었 으며, 자본자유화 이후에는 환율제도가 자 유변동환율제도로 전환함에 따라 독립적 인 통화정책을 유지할 수 있는 여지가 있 었다. 하지만 한국과 같은 소규모 개방경 제의 경우 자본시장이 완전히 개방되어 국 가 간 연계성이 증가하고, 막대한 양의 국 제자본 유출입이 발생하여 환율과 자산 시 장의 심각한 불안정성을 초래할 수 있으므 로 외국의 통화정책과 자본 흐름으로부터 완전히 자유로운 통화정책을 집행하기 어 려울 수 있다. 본 논문의 실증분석에서는