ABSTRACT
In contrast to other Asian countries, Korea experienced significant trade balance surpluses and net capital outflows during the period of 1986-89 peaking at about 6 percent of GDP in 1987, followed by net capital inflows beginning in 1990. The volume of cumulative capital inflows until 1995 amounted to about 10 percent of GDP. Confronted with such large current balance surpluses and capital inflow surges, the Korean monetary authorities actively implemented sterilized foreign exchange interventions through open market operations (OMOs), increases in reserve requirements, and other various measures, as most countries have commonly done, in an effort to balance longer-term monetary control and short-term exchange rate stability. As the main instrument for OMOs, they have used the central bank's interest-bearing bonds called "monetary stabilization bonds" (MSBs) that are directly backed by printing money rather than government bonds that are primarily backed by legal taxation. Attempting to insulate the monetary base from foreign exchange market interventions, the Bank
of Korea (BOK) has incurred high "quasi-fiscal costs" from buying lowyielding foreign assets and selling high-yielding short-term MSBs with maturities of 3 months to 1 year. Such opportunity costs may give rise to differences in the dynamics of foreign exchange interventions, sterilization, and monetary controls relative to those of the countries in which government bonds are used as the principal tools of OMOs.
