Do Capital Inflows Matter to Asset Prices? The Case of Korea* 


  • * 

    We thank two anonymous referees and Craig Parsons for various useful suggestions.

Kim (corresponding author): Department of Economics, Seoul National University, San 56-1, Sillim-Dong, Gwanak-Gu, Seoul 151-746, Korea. Email:, Yang: Asian Development Bank Institute, Kasumigaseki Building 8F, 3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan. Email


In the present paper, we investigate whether capital flows induce domestic asset price hikes in the case of Korea. This issue is relevant for crisis-hit economies trying to prevent a boom–bust cycle as well as in the formulation of macroeconomic policy objectives in emerging market economies. Korea has recently experienced large capital inflows, in particular a surge in portfolio inflows. Furthermore, asset prices, including stock prices, land prices and nominal and real exchange rates, have also appreciated. The empirical results, obtained using a vector autoregression model, suggest that capital inflow shocks have caused stock prices but not land prices to increase. The effects on the nominal and real exchange rates have been limited, which relates to the accumulation of foreign exchange reserves.