①Traditionally, a current account surplus has been understood to reflect enhanced competitiveness of domestic goods and expanded net exports, accompanied by a falling real exchange rate (KRW appreciation). However, since 2023 Q2, Korea has experienced a prolonged episode in which a widening current account surplus has coincided with a rising real exchange rate (KRW depreciation).

②Since the Global Financial Crisis, the composition of Korea’s overseas assets has tilted toward private-sector portfolio investment, and away from public-sector reserve assets. This shift has occurred alongside rising savings and slowing domestic investment associated with demographic aging. Since the current account simultaneously reflects the outcome of net exports and net capital outflows, this structural change in external asset accumulation suggests that the factors driving fluctuations in the current account and the real exchange rate may have changed.

③To empirically examine this possibility, we distinguish between “goods shock” (which generate a current account surplus alongside KRW appreciation) and “financial shock” (which generate a current account surplus alongside KRW depreciation) and assess the relative importance of each type across subperiods. We find that the overall frequency of financial shocks is similar before and after Korea's transition to net external creditor status, but that positive financial shocks — those associated with capital outflows and KRW depreciation — have become more frequent. Compared with major advanced economies with deeper FX markets, currency depreciation following financial shocks is relatively larger in Korea.

④We use a structural model (a two-country New Keynesian open economy model) to provide a structural interpretation of the empirical findings and to quantify the effects of each shock. Positive financial shock is further decomposed into an increase in residents' demand for dollar assets (corresponding to a decrease in non-residents' demand for KRW assets) and an expansion of savings demand. The results indicate that the influence of goods shocks, which drove KRW appreciation through around 2014, has weakened in recent years, while the influence of dollar asset demand and savings demand — driven by demographic aging and weak domestic investment — has strengthened. The recent pattern of current account surplus coinciding with KRW depreciation can be attributed to these structural shifts.

⑤These findings suggest that the adjustment mechanism between the current account and the real exchange rate is changing as Korea transitions toward a stage of private-sector-led overseas asset management. They also imply that the importance of resident capital flows for the external sector and the exchange rate has grown relative to the past, underscoring the need to account for resident capital flows in policies aimed at maintaining FX market stability.

⑥During this structural transition, if resident demand for overseas assets expands rapidly in the short term, or if volatility in non-resident capital flows increases due to changes in external conditions, FX market sensitivity may rise and supply-demand imbalances may intensify, amplifying exchange rate volatility. This points to the need for policy responses to address short-term supply-demand imbalances alongside medium- to long-term policies aimed at deepening the FX market.