The Role of Foreign Reserves at Crisis

Journal of Korean Economic Analysis, Number 17 Issue 0, 2011

Posted: 24 Aug 2014

See all articles by Jong-Eun Lee

Jong-Eun Lee

Sejong University - Department of Economics

Date Written: January 15, 2011

Abstract

The purpose of this study lies in the protection of the Korean economy. Korea is an inspirational country that has always been aiming high, that is, the sound growth with incredibly high morality in the international financial markets and the full-hearted willingness to contribute to the mankind, rising above all the devastating and unfortunate incidences under her complicated geopolitical and historical environments. She is worth of being protected from any financial disruptions as well as military provocations. With this motivation, this study centers on the foreign reserves in the Korean economy during the recent global financial crisis started in 2008. Various angles and methodologies provide plenty of questions and answers, requiring thoughtful interpretations and implications on the endogenous relationships among the foreign reserves, foreign exchange market, stock market, bond market, swap market, and the short-term external debts. The role of the foreign reserves has been by and large positive during the recent global financial crisis and it is difficult to claim that its accumulation generates excessive devaluation of the Korean Won against the US dollar. However, it is found that the foreign reserves substantially explain the forecasting error variance of the Won-U.S. dollar exchange rate, so we need to be alert on the future directions of its accumulation hereafter. The swap market is observed to have a tendency to deviate from the long-term equilibrium compared to the bond and foreign exchange market, and the swap basis considerably explains the foreign reserves in the forecasting error variance decomposition. It implies the need to make swap market deeper and thicker with more market participants if the full-fledged foreign exchange market is pursued. The structural impacts of policy interest rates on the foreign reserves are found to be different in the cases of China, Japan, and Korea, i.e., always positive, insignificant, positive to negative respectively. It allows us to conjecture the movements of the China’s foreign reserves with the Yuan revaluation hereafter.

Keywords: Foreign Reserves, Financial Crisis, Won-Dollar Exchange Rate

JEL Classification: E44, F31

Suggested Citation

Lee, Jong-Eun, The Role of Foreign Reserves at Crisis (January 15, 2011). Journal of Korean Economic Analysis, Number 17 Issue 0, 2011, Available at SSRN: https://ssrn.com/abstract=2485482

Jong-Eun Lee (Contact Author)

Sejong University - Department of Economics ( email )

Seoul, 05006
Korea, Republic of (South Korea)
+82-2-3408-3137 (Phone)

HOME PAGE: http://dasan.sejong.ac.kr/~jongeunlee/Prof._Jong-Eun_Lee/Main.html

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