How Did Korea A Free Floating Exchange Rate System?
Under the supervision of the IMF, Korea adopted a free floating exchange rate system. Ever since, the liberalization of the FX market removed ceilings on foreign investment in Korea equities and money markets. This allowed the Korean won to be less exposed to speculative currency attacks. In a managed system, Korea needed vast foreign reserves to keep the value of the won at a certain level. Its depletion of foreign reserves in response to capital flight was what contributed to Korea’s financial collapse in 1997. Yet in a free floating system, the value of a currency would be determined by market demand forces. As the currency, would in theory, display correct values, it would be more immune to currency speculation. However this does not mean that it won’t be affected by market sentiments.
Although officially Korea maintains a free floating system, it also admits to using government intervention as a means of stabilization. Thus, it can be said that Korea practices managed floating currency system, not a pegged one like the 1990s nor a completely free floating one. Instead, Korea was took towards building its foreign reserves which has been close to being depleted as an aftermath of the financial crisis. The degree of flexibility of an exchange rate regime should …show more content…
Quoting the words of Rhee, ex-Deputy Governor of the Bank of Korea, the internalization of the Korean won could effectively respond to sudden capital outflows and strengthen its resilience to the shocks. That is, it could reduce the risk of currency mismatch, which could help to reduce the side effects of sudden foreign capital flows, such as boom-bust cycles or systemic sudden stops in the global financial markets. Moreover, securities issued overseas usually have long-term maturities. Rollover risk, particularly during periods of financial turmoil, would be lessened. (Rhee,
Although officially Korea maintains a free floating system, it also admits to using government intervention as a means of stabilization. Thus, it can be said that Korea practices managed floating currency system, not a pegged one like the 1990s nor a completely free floating one. Instead, Korea was took towards building its foreign reserves which has been close to being depleted as an aftermath of the financial crisis. The degree of flexibility of an exchange rate regime should …show more content…
Quoting the words of Rhee, ex-Deputy Governor of the Bank of Korea, the internalization of the Korean won could effectively respond to sudden capital outflows and strengthen its resilience to the shocks. That is, it could reduce the risk of currency mismatch, which could help to reduce the side effects of sudden foreign capital flows, such as boom-bust cycles or systemic sudden stops in the global financial markets. Moreover, securities issued overseas usually have long-term maturities. Rollover risk, particularly during periods of financial turmoil, would be lessened. (Rhee,