Author: Jongho Park(Soongsil University)

This paper examines foreign liabilities of the non-financial corporate sector in Korea. Foreign liabilities of the non-financial corporate sector has increased steadily for last 20 year where the corporate bond issuance has been the main driver of the trend. Motivated by such trend, this paper investigates how the external financing costs affect FOREX market and business cycles in Korea. An empirical investigate suggest that the external financing costs leads exchange rate fluctuations and business cycles. In addition, the external financing costs possesses statistically significant information in forecasting exchange rate and business cycles. VAR analysis suggests that the adverse shocks to the external financing costs result in economic downturn along with the currency depreciation. Furthermore, the counter-factual analysis suggests that the exchange rate channel plays a non-trivial role in transmission of shocks to the external financing costs.