A New Macro-Financial System for a Stable and Crisis-resilient Growth in Korea

Abstract

A structuralist macroeconomics perspective is taken to interpret

the two recent financial crises in Korea, and new policy framework

and reform measures are suggested to build a crisis-resilient macrofinancial

system. This paper focuses on the Frenkel-Neftci cycle

(Taylor 1998) and the two kinds of expected spreads, interest

spread and capital gain spreads, which initially motivate foreign

investment in emerging economies. To establish a crisis-resilient

macro-financial system, a new macro policy framework that can

be described as an intermediate system is proposed, with full

capital mobility but with an explicit option of Tobin taxes, flexible

basket, band, and crawl (BBC) exchange rate system, and relative

independence in monetary policy striking a new balance between

interest rates and exchange rate targeting. An intermediate system

is proposed because it is not easy to prevent the two kinds of

spreads from happening simultaneously in a standard open macroeconomic

policy setting.