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Effects of Monetary Policy Shocks on the Exchange Rate in the Republic of Korea: Capital Flows in Stock and Bond Markets

dc.contributor.authorSoyoung Kim
dc.description.abstractSeveral studies have suggested that the prediction of standard theory on the effects of monetary policy on the exchange rate might not be applicable to or in the case of the Republic of Korea because participation of foreign investors is weak in the bond market but strong in the stock market. The current study examines the effects of monetary policy shocks on the exchange rate in the Republic of Korea by using structural vector auto-regression models with sign restrictions. To determine the channels by which monetary policy shocks affect the exchange rate, I investigate the effects on various components of capital flows. The main empirical findings are as follows. First, a contractionary monetary policy shock, which increases the interest rate, appreciates the Korean won significantly in the short run as predicted by most theories. Second, contractionary monetary policy shocks increase capital inflows into the bond market consistent with the prediction of the uncovered interest parity condition. This seems to be the main channel by which contractionary monetary shocks appreciate the won. Finally, foreign investors tend to withdraw money from the domestic stock market in response to a monetary tightening, resulting in a decrease in capital inflows.
dc.publisherAsian Development Bank
dc.rightsCC BY 3.0 IGO
dc.titleEffects of Monetary Policy Shocks on the Exchange Rate in the Republic of Korea: Capital Flows in Stock and Bond Markets
dc.subject.expertDevelopment Challenges
dc.subject.expertDevelopment Issues
dc.subject.expertDevelopment Problems
dc.subject.expertMicroenterprises Finance
dc.subject.expertCommercial Finance Companies
dc.subject.expertEnterprise Financing
dc.subject.expertFinancial Analysis
dc.subject.expertBanking Finance And Investment
dc.subject.adbProject finance
dc.subject.adbDevelopment plans
dc.subject.adbStrategic planning
dc.subject.adbBusiness Financing
dc.subject.adbInvestment Requirements
dc.subject.adbInsurance Companies
dc.subject.adbInternational Monetary Relations
dc.subject.adbInternational Financial Market
dc.subject.adbExchange Rate
dc.subject.naturalInsurance stocks
dc.subject.naturalInsurance holding companies
dc.subject.naturalInsurance carriers
dc.subject.naturalInsurance agencies
dc.subject.naturalBusiness subsidies
dc.subject.naturalInvestment companies
dc.subject.naturalInternational banks and banking
dc.subject.naturalStock exchanges
dc.contributor.imprintAsian Development Bank
oar.adminregionEast Asia Region
oar.countryRepublic of Korea
oar.authorKim, Soyoung

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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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