Dealing with the benefits and costs of internationalization of Korea won

August 2009

Abstract

Although Korea’s share in international trade and finance has increased remarkably, the international use of the Korean won has so far been insignificant even in the Asian region. We discuss the potential benefits and costs of currency internationalization with reference to some recent episodes in the Korean economy. The fact that Korea has been one of the emerging markets most affected by the global financial distress, in spite of its relatively healthy macroeconomic fundamentals, spells out why currency internationalization is essential to a small open economy like Korea.

However, internationalization of the local currency will damage further the effectiveness of monetary policy, which is already being experienced due to the large scale of capital flows. Moreover, in its early stages, internationalization of the won may hinder rather than help the stabilization of the domestic capital market.

Thus, one of the possible ways is to consider for the won becoming a currency that circulates locally within East Asia and strengthening regional currency and financial cooperation involving the Korean won.