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2022 Jun/30
Global Monetary Policy Divergence: Impacts on Korea’s Capital Flow and its Implications
Issue Papers 22-09
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- Research Topic Macrofinance
- Page 22
- Summary
- Amid signs of recovery in the real economy and higher inflation, major economies have increasingly taken different approaches to monetary policy. Starting this year, the US and the UK are tightening monetary policy at a faster pace while Europe and Japan maintain the expansionary monetary policy stance. Such divergence between advanced economies can be commonly observed in the two rate hike cycles of the US during the early 2000s. It has been found that in the previous rate hikes, the adverse effects such as abrupt capital outflows from emerging markets were only limited.
Korea has also seen the negative impact arising from monetary tightening of the US diminishing since the global financial crisis. According to the empirical analysis conducted by this article, monetary policy divergence between major economies plays a significant role in partially offsetting the effects of the US rate hikes on the overall capital flows in Korea. The analysis implies that if the monetary policy decoupling continues, greater external uncertainties such as accelerated monetary tightening by the US would have only a limited impact. However, considering that existing risk factors were unprecedented in the previous rate hike cycles of the US, it is advised against an optimistic outlook that the negative effects of rate hikes would be extremely limited.
Korea has recorded a current account surplus and tightened its FX soundness regulation, which has made its economic fundamentals stronger enough to respond to instability in the global financial market. Still, however, greater external uncertainties serve as major factors behind sudden capital flows in Korea and other emerging economies, which requires extra caution. More recently, a prolonged geopolitical conflict and a delayed recovery in global supply chains are raising the possibility that inflation would become entrenched. Accordingly, thorough preparation should be made to deal with various risk factors such as simultaneous monetary tightening implemented by central banks of advanced economies.