Drivers of Korea’s Gross Capital Flows

We identify unobserved global and regional latent factors that drive gross capital inflows and outflows of Korea using a multi-level factor model, and investigate the importance of these global, regional, and local drivers on both gross and net capital flows by variance decompositions. The estimated global and Asian common factors together account for approximately 70% of capital outflows, whereas they account for only approximately 40% of capital inflows of Korea. Capital outflows are strongly affected by global and regional shocks, whereas capital inflows are predominantly driven by the country-specific factor. In the past, the global factor used to be an important driver of both capital inflows and outflows. More recently, however, the global factor’s contribution to capital inflows drastically shrank, but its importance rose further in capital outflows. The global and regional drivers of gross flows appear to have a minimal effect on net capital inflows for Korea.