Exchange Rate Constraints and Money Control in Korea

This paper applies two traditional empirical approaches to investigate how successfully Korea managed to control money supply in response to the changes in foreign reserves since 1980. One is to estimate offset coefficients and the other is to estimate sterilization coefficients. The estimation results are as follows. Reflecting strict and effective capital controls, the domestic monetary policies were partially offset mainly by short-term capital flows. The Bank of Korea pursued sterilization policies very actively. Particularly, sterilization was more active during the late 1980s of huge current account surplus than during the early 1990s of a surge in capital flows. There were over-sterilization during the early 1 980s when foreign reserves kept dropping, which implied that monetary policies were directed to worsening the balance of payments deficit rather than improving it.