The Effects of Social Costs of Excess Foreign Exchange Reserves on the Economic Growth in Korean

Abstract

Purpose This paper analyzes the direct and indirect effects of the social costs of excess foreign exchange reserves on economic growth in Korea Design/Methodology/Approach We used the ARDL bounds test using quarterly data on the social costs of excess foreign exchange reserves, economic growth, trade, foreign direct investment, and financial instability from 2000 to 2020. At this time, social cost was calculated by subtracting the appropriate foreign exchange reserves calculated according to the IMF rules from actual foreign exchange reserves. In addition, economic volatility and real effective exchange rate were used as control variables to reflect the economic characteristics of Korea and the characteristics of a small open economy with high external dependence. Findings As a result of analysis, it was found that the increase in social costs of excess foreign exchange reserves not only directly contributed to economic growth in the long term but also has an indirect effect on economic growth through increased trade and foreign direct investment, and eased financial instability. On the other hand, in the short term, the increase in the social costs of excess foreign exchange reserves not only directly contributed to economic growth but also had an indirect effect by easing financial instability. Research Implications The results of this study can be used to suggest the validity of Korea