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Are Capital Controls Effective? The Case of the Republic of Korea. Asian Development Review, Vol. 29(2), pp. 96-133

dc.contributor.authorSoyoung Kim
dc.contributor.authorDoo Yong Yang
dc.description.abstractMarket economies threaten to bring about economic instability and heighten difficulties in implementing macroeconomic policies. While an option that can be taken to deal with huge capital inflows involves the use of capital controls, there is no consensus on their effectiveness. Against this background, our paper aims to investigate the effectiveness of capital controls in the Republic of Korea. This paper first reviews the history of capital account policy, which can be divided into five stages: (i) gradual liberalization during the 1980s and early 1990s, (ii) acceleration of liberalization during the early and mid-1990s, (iii) the big-bang approach to liberalization during the Asian financial crisis, (iv) liberalization for facilitation of capital market development beginning the late 1990s, and (v) the conservative approach during the global financial crisis. To quantify the trends, this paper constructs measures of capital account control/liberalization based on the official record of government policies. In the second part, it discusses the effects of capital account control/liberalization in four ways. First, the behavior of key macro variables in the Republic of Korea is reviewed by comparing the periods before and after serious capital account liberalization. Second, the effects of shocks to the capital account control/liberalization indexes on capital flows are examined using a VAR model. Third, the effects of the United States (US) monetary policy shocks on capital flows and the interest rate of the Republic of Korea are examined for the period of capital controls and the period of capital account liberalization. Fourth, a simple event study is conducted of recent capital control measures. The empirical results based on VAR models show that shocks to capital account controls do not have significant effects on capital flows in most cases. However, capital flows, the current account, and the exchange rate were far more volatile in the period of a liberalized capital account. It is also interesting that during the latter period, the Republic of Korea did not gain monetary autonomy despite adopting a freely floating exchange rate. This result may be related to volatile capital flows under a liberalized capital account. Finally, the results of the event study tend to support the effectiveness of capital controls in altering the composition of capital flows.
dc.publisherAsian Development Bank
dc.rightsCC BY 3.0 IGO
dc.titleAre Capital Controls Effective? The Case of the Republic of Korea. Asian Development Review, Vol. 29(2), pp. 96-133
dc.subject.adbEconomic policy
dc.title.seriesAsian Development Review
dc.title.volumeVolume 29, Number 2, pp. 96-133
dc.contributor.imprintAsian Development Bank
oar.authorKim, Soyoung
oar.authorYang, Doo Yong

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  • Asian Development Review
    The Asian Development Review (ADR) is a professional journal for disseminating the results of economic and development research relevant to Asia and the Pacific. Since 1983, the ADR has been an important part of the history of the Asian Development Bank and its mission to reduce poverty across Asia and the Pacific.

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