What Explains Current Account Surplus in Korea?
Chirok, Han; Kwanho, Shin | December 2016
Abstract
Since the currency crisis in 1998, Korea has experienced continuous current account surpluses. Recently the current account surplus increased more rapidly amounting to 7.7% of GDP in 2015. In this paper, we investigate the underlying reasons as to why Korea’s current account surpluses are widening. We find that the upward trend in Korea’s current account surpluses is essentially explained by its demographical changes. Demographical changes are so powerful that they explain, quite successfully, the current account balance trends of other economies with highly aged populations such as Japan, Germany, Italy, Finland and Greece as well. When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, in order to reduce current account surplus by 1 percentage point, a whopping 12% depreciation is needed. If Korea’s current exchange rate is undervalued 4 to 12 percent than the level consistent with fundamentals, it is impossible to reduce Korea’s current account surplus to a reasonable level by adjusting the exchange rate alone. Another way to reduce current account surplus is to expand fiscal policies. We find, however, that the impact of fiscal adjustments in reducing current account surplus is even more limited. If we allow endogenous movements of exchange rate and fiscal policy, the impact of exchange rate adjustment increases by 1.6 times but that of fiscal policy decreases that it is no longer statistically significant.
Citation
Chirok, Han; Kwanho, Shin. 2016. What Explains Current Account Surplus in Korea?. © Korea Institute for International Economic Policy. http://hdl.handle.net/11540/9183.Print ISBN
978-89-322-4266-8
Keywords
Macroeconomic
Macroeconomic Analysis
Macroeconomic Framework
Macroeconomic Models
Macroeconomic Performance
Macroeconomic Planning
Macroeconomic Policies
Macroeconomic Reform
Macroeconomic Stabilization
Results-Based Monitoring And Evaluation
Project Evaluation & Review Technique
Project Evaluation
Program Evaluation
Performance Evaluation
Operations Evaluation
Evaluation Methods
Evaluation
Social condition
Economic dependence
Economic assistance
International monetary relations
International monetary relations
International trade
National accounting
Market
Project impact
Development projects
Program management
Performance appraisal
Project appraisal
Technology assessment
Economic indicators
Growth models
Gross domestic product
Macroeconomics
Economic forecast
Exports
Exports
Exchange
Comparative economics
Index number
Monetary policy
Value analysis
Adjustment cost
Transaction cost
Conditionality
International relations
Cumulative effects assessment
Grievance procedures
Participatory monitoring and evaluation
Exchange rate
Economic development projects
Economic policy
Economic forecasting
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