Endnotes

¹ Gross capital flows are defined as investments by residents (outflows) and non-residents (inflows), limited to direct investment, equity investment, bank loans and bond investment. Transfers are not included since transfer payments are very small in Korea.

² However, some of the investment planned by these firms may be relocated to other countries in a relatively short period of time in the form of foreign direct investment in response to the adverse shock, a possibility that is rather limited in a controlled capital account regime.

³ If the deficit reflects changes in economic fundamentals instead, external borrowing simply masks the imbalances that require real sector adjustments.

⁴ Professor Shinji Tagaki comments that, according to the liberalization index of Chinn and Ito, Korea’s liberalization procedure went backward just before and after the crisis. It is strange that the index shows a temporary setback, indicating a smaller degree of liberalization during the 1996-2000 period. However the general picture is of Korea moving toward greater liberalization.

⁵ Specifically, we generate the standard error bands based on a Bayesian method, as described in the RATS Manual.

⁶ A linear trend in GDP is assumed. Assuming different types of trend such as a quadratic trend does not affect the results much.

⁷ Exceptions are: housing price, apartment price, and nominal and real effective exchange rate. We could not obtain the end of period value for these data series.

⁸ Refer to Christiano, Eichenbaum, and Evans (1999).

⁹ The results on the determinants of capital flows are similar in the model with capital outflows.

¹⁰ This type of assumption is widely used in past studies. See, for example, Sims and Zha (2006), Kim (1999), and Kim and Roubini (2001).

¹¹ We also assume that domestic output is contemporaneously exogenous to domestic price level based on the idea that real variables are more fundamental than nominal variables. At any rate, the results are similar under the assumption that domestic price level is contemporaneously exogenous to domestic output. On the other hand, we assume that domestic variables are contemporaneously exogenous to capital inflows, but that there can be a simultaneity between domestic variables and capital inflows. We leave a more rigorous study to resolve the issue as a future study.

¹² See Miskin (2007) and exponents of the Fed-view including Schwartz (2002), Bernanke and Gertler (1999, 2001), Gilchrist and Leahy (2002), and Goodfriend (2003).

¹³ See Bordo and Jeanne (2002), Cecchetti et al (2000, 2002), and White (2006).

¹⁴ In Korea, foreign real estate purchases by domestic resident have been permitted since May 2006.

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