The US Monetary Policy Normalization: The Impact on Korean Financial Market and Capital Flows

Most previous studies have shown that push factors have had a greater impact on capital outflows in emerging economies than pull factors. Meanwhile, in May 2018, the US Federal Reserve Chairman Jerome Powell addressed the controversy over capital movements to emerging economies after the global financial crisis. Powell said the inflows of capital into emerging economies are unlikely to have been caused by the Fed's interest rate policy. Powell's speech contains "implied" warnings that the US monetary policy is not a triggering force of a capital outflow in emerging economies. This is why Powell’s speech is adding to the difficulty of policy responses in emerging countries. This, in turn, suggests that it is necessary to check the determinants of global capital flows. In addition, the impact of US monetary policy on Korea's financial markets and capital outflows needs to be analyzed in depth. In this paper, the discussion of push (external) vs. pull (internal) factors of capital flow is examined using panel data of 47 countries. Our empirical results show that the push and pull factors determining capital flows to advanced economies and emerging market economies are different. This study also analyzes the impact of the normalization of US monetary policy on the domestic financial market and foreign exchange market by using the TVP-VAR model. Our analysis shows that US credit spread shock, which is an indicator of uncertainty in international financial markets, has had a negative impact on domestic financial markets and capital inflows. On the other hand, the impact of the US policy rate hike after 2015 was limited.