Why Are There Large Foreign Exchange Reserves? The Case of South Korea

Franklin Allen; 홍주연

Why Are There Large Foreign Exchange Reserves? The Case of South Korea

Korean Social Science Journal
Abbr : KSSJ
2011, 38(2), pp.1-33
Publisher : Korean Social Science Research Council
Research Area : Social Science > Social Science in general

Franklin Allen ¹, 홍주연 ¹

¹University of Pennsylvania

Accredited

ABSTRACT

In the 1997 Asian Financial Crisis, South Korea, which had been a very successful economy, was forced to raise interest rates and cut government spending by the IMF. These measures caused great economic distress. Because Asian countries were not well represented in the IMF’s governance structure, Korea could not effectively appeal the decision. We argue that what Korea and neighboring countries learned from this experience was that they had to accumulate their own reserves to self-insure against future crises. This self-insurance in East Asia has allowed Korea to navigate the current crisis well. However, the trillions of dollars of foreign exchange reserves accumulated in Asia have contributed to the ‘global imbalances’ that have played an important role in causing the current crisis. We suggest three possible solutions: reform of IMF governance,increased liquidity through regional risk sharing and foreign exchange swaps, and the Chinese RMB as a reserve currency.

KEYWORDS

foreign exchange reserves, Asian Crisis, IMF, self -insurance

Citation status

* References for papers published after 2023 are currently being built.

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