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Bank of Korea Governor Kim Choong-soo on Wednesday proposed policy options to prevent volatile capital flows in the future, but remained tight-lipped on specifics.
In a speech before members of the European Union Chamber of Commerce in Korea (EUCCK) at the Seoul Plaza Hotel, Kim said these policy options will effectively sustain stable growth and moderate external shocks in the Korean economy.
``Sound macro-economic policies are the first line of defense in reducing countries’ vulnerability to external shocks. Events that might trigger a crisis situation such as an overhang of short-term external debt or lack of foreign reserves should be promptly resolved,’’ Kim said.
In the long-term, Kim suggested the development of foreign exchange markets to ensure that exchange rates do not swing wildly over short periods due to fluctuations in capital flows.
Kim also said macro-prudential options should be considered as a way to moderate the volume of capital flows.
``Properly designed and well-implemented macro-prudential frameworks could play an effective role in alleviating the pro-cyclicality of capital flows. Lastly, it is necessary to strengthen international cooperation. Given the current environment of financial globalization, it is no longer possible for any individual country to fully manage cross-border risk on its own,’’ he said.
But when pressed for specifics, Kim said the government and the Bank of Korea have not made any decision on what measures to take. ``I don’t think we would introduce any instrument that is not in line with international practice,’’ he said.
The Bank of Korea is expected to announce measures dealing with the capital inflows after the G20 Seoul Summit in November.
Kim’s speech at the EUCCK came after the finance chiefs from the G20 economies agreed over the weekend to avoid competitive currency devaluations and adhere to market-based exchange rates. The final statement said ``these actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries.’’
``Such a statement has a significant policy implication for a country like Korea, whose day-to-day currency fluctuations are much higher than those of other G20 member economies,’’ Kim added.
As the G20 Seoul Summit draws closer, Kim hopes G20 leaders will forge agreements on critical global issues to overcome and prevent any crises.
``I trust the G20 Seoul Summit will serve the purpose of guiding a new vision for a post-crisis economic paradigm that will definitely mitigate the uncertainty in the market. Alleviating this uncertainty is essential for currency volatility reduction and financial market stability,’’ the Bank of Korea governor said.
Considering the country’s past in dealing with unstable capital flows, Kim said Korea remains concerned about the problems these pose for macro-economic management in dealing with the ``impossible trinity’’ and the risk of a ``sudden stop.’’
The ``impossible trinity’’ refers to the three desirable goals ― capital market opening, fixed and or stable foreign exchange rate and monetary policy ― of which one must be sacrificed if the two other goals are to be achieved.
The Bank of Korea last June worked with the Korean government to introduce macro-prudential measures to mitigate the volatility of capital flows, as a way to minimize systemic risk in the Korean economy. This includes the new system of ceiling on bank’s foreign exchange derivatives positions to curb excessive short-term overseas borrowings, as well as tighter regulations on foreign currency loans.
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