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

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.