Macro-Prudential Response to Increased Global Market Volatility

11 Pages Posted: 1 May 2016  

Tae Soo Kang

Korea Institute for International Economic Policy

Tae Hoon Lim

Korea Institute for International Economic Policy

Hyunduk Suh

INHA University

Eunjung Kang

Korea Institute for International Economic Policy

Date Written: March 14, 2016

Abstract

Volatilities of price indicators have remained extremely stabilized during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down risk premium. That could lead global investors’ risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received a huge capital inflows backed up by the increased risk appetite of global investors.

US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premium to normalize too. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we overview volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset? Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows.

Keywords: macroprudential, volatility, emerging market, global liquidity

Suggested Citation

Kang, Tae Soo and Lim, Tae Hoon and Suh, Hyunduk and Kang, Eunjung, Macro-Prudential Response to Increased Global Market Volatility (March 14, 2016). KIEP Research Paper World Economy Update- No.16-07 . Available at SSRN: https://ssrn.com/abstract=2772336

Tae Soo Kang (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Tae Hoon Lim

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Hyunduk Suh

INHA University ( email )

253 Yonghyun-dong
Nam-gu Incheon 402-751

Eunjung Kang

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Paper statistics

Downloads
45
Abstract Views
278