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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 23, No. 2, pp.145-186
ISSN: 1225-0279 (Print)
Print publication date 31 May 2010
Received 11 Oct 2009 Revised 16 Apr 2010

A New Macro-Financial System for a Stable and Crisis-resilient Growth in Korea

Keun Lee ; Ginil Kim ; Hong Kee Kim ; Hong-Sun Song
Corresponding Author, Professor, Department of Economics, Seoul National University, Seoul 151-746, Korea, Tel: +82-2-880-6367, Fax: +82-2-886-4231 klee1012@plaza.snu.ac.kr
Associate Professor, School of Economics, Kookmin University, Seoul 136-702, Korea ginilk@kookmin.ac.kr
Professor, Department of Economics, Hannam University, Daejeon 306-791, Korea hongkee@hnu.kr
Research Fellow, Korea Capital Market Institute, Seoul 150-974, Korea dna0214@kcmi.re.kr

JEL Classification: E6, F2, F4

Abstract

A structuralist macroeconomics perspective is taken to interpret the two recent financial crises in Korea, and new policy framework and reform measures are suggested to build a crisis-resilient macro-financial system. This paper focuses on the “Frenkel-Neftci” cycle (Taylor 1998) and the two kinds of expected spreads, interest spread and capital gain spreads, which initially motivate foreign investment in emerging economies. To establish a crisis-resilient macro-financial system, a new macro policy framework that can be described as “an intermediate system” is proposed, with full capital mobility but with an explicit option of Tobin taxes, flexible basket, band, and crawl (BBC) exchange rate system, and relative independence in monetary policy striking a new balance between interest rates and exchange rate targeting. An intermediate system is proposed because it is not easy to prevent the “two kinds of spreads” from happening simultaneously in a standard open macroeconomic policy setting.

Keywords:

Financial crises, BBC (basket, bands, and crawl), Tobin taxes, Intermediate system, Capital controls

Acknowledgments

This research was supported by a grant (RISA 2009-6) from the Research Institute for Social Advancement. The authors would like to thank Wai Mun Chia, Doowon Lee, Soyoung Kim, and Inhyung Lee for their helpful comments or information; and Jin Son for research assistance.

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