Macroprudential Regulation of International Finance
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Macroprudential Regulation of International Finance Managing Capital Flows and Exchange Rates

Managing Capital Flows and Exchange Rates

  • KDI/EWC series on Economic Policy

Edited by Dongsoo Kang and Andrew Mason

Recent events, such as capital flow reversals and banking sector crises, have shaken faith in the widely held belief in the benefits of greater financial integration and financial deepening, which are typical in advanced economies. This book shows that emerging economies have often weathered the storm best despite the supposed burden of ‘weak institutions’. It demonstrates that a better policy framework requires reliable indicators of vulnerability to financial instability, as well as improved policy tools and automatic stabilizers that anticipate and limit the vulnerabilities to financial crises.
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Chapter 7: International reserves for emerging economies

Jong- Eun Lee

Extract

The coffer of international reserves is the most realistic way out for emerging economies to alleviate exchange rate instability problems and thus to prevent a currency crisis. Like most economic issues, however, a huge accumulation of international reserves also has a Möbius strip–like nature—that is, both defending and depreciating the domestic currency depending on the circumstances (Lee, 2016). Given the crucial role of international reserves and their contradictory aspects, we need to take a look at international reserves from various angles.

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