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    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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    Citable URI
    http://hdl.handle.net/11540/9183
    Metadata
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    Thumbnail
    WP16-15.pdf (2.733Mb)
    Author
    Chirok, Han
    Kwanho, Shin
    Theme
    Economics
    Evaluation
     
    Copyright 2016-2020 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2020 Asian Development Bank Institute, except as explicitly marked otherwise