The macroeconomic effects of capital account liberalization in Korea are examined. Simple data analysis suggests that capital account liberalization substantially changed the nature and composition of capital flows. Based on the VAR model, we find the following stylized facts: First, after capital market liberalization, capital flows become less driven by current account imbalances and therefore become more autonomous. Second, capital account liberalization significantly changes the effects of capital flows on macroeconomic variables. Third, capital account liberalization is highly related to consumption and investment booms, and subsequent appreciation of nominal and real exchange rates, which leads to the current account worsening. (The rest is omitted.)

Executive Summary

I. Introduction

II. Capital Account Liberalization and Capital Flows in Korea
1. Liberalization in the 1980s
2. Liberalization in the 1990s Prior to the Crisis
3. IMF Program and Further Liberalization
4. Components of Capital Account

III. Empirical Analysis
1. Vector Auto-Regression Model
2 The Nature of Capital Flows
3 Effect on Macroeconomic Variables
4 Boom-bust Cycles
5 Foreign Exchange Market Intervention and Sterilization Policy

IV. Conclusion

References