• KDI Journal of Economic Policy
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• v.31 no.2
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• pp.235-266
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• 2009

This paper investigates changes in the extent of exchange rate pass-through to export price in Korea. First, empirical results show that export prices have become less responsive to the exchange rate since the financial crisis in 1997. The decline of exchange rate pass-through to export prices suggests that Korean exporters are more likely to use profit margins to absorb part of the impact of exchange rate changes, consistent with pricing to market phenomenon. Second, this paper finds asymmetries in the response of export prices to exchange rate changes. In the post-crisis period. appreciations are more likely to be offset by markup adjustment than depreciations. Third, this paper documents that a significant portion of the decline of exchange rate pass-through is a result of both increased volatility of exchange rate and increased competition with China in the world market.

• KDI Journal of Economic Policy
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• v.12 no.1
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• pp.111-125
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• 1990

For the last several years, considerable criticism has been leveled against Korea's exchange rate management. While Korea was designated a currency manipulator by the U.S., domestically it is often complained that the won/dollar rate did not adequately reflect changes in Korea's export competitiveness and fluctuations in the exchange rates of major currencies. In view of this situation, Korea changed its exchange regime at the beginning of March this year from the dual currency basket system to a more flexible one, called a "market average rate regime". Under this new regime, the won rate is determined in the exchange market based upon the supply of and demand for foreign exchange and is allowed to freely fluctuate each day within a + 0.4 % range. This paper, first, seeks to evaluate Korea's exchange rate management under the dual basket regime of the 1980s, and then to construct an optimal currency basket for the won which could provide a proper indicator for exchange market intervention under the new market average rate regime. The analysis of fluctuations in the real effective exchange rate (REER) of the won indicates that the won rates in the 1980s failed not only to offset changes in relative prices between home and trading partner countries, but also to properly respond to variations in major exchange rates as further evidenced by sizable fluctuations in the nominal effective rates of the won. In other words, the currency basket regime which was adopted in 1980 for the stabilization of the REER of the won has not been operated properly, mainly because authorities often resorted to policy considerations in determining the won's rate. In the second part of the paper, an optimal currency basket for Korea is constructed, designed to minimize the fluctuations in the REER of the won without including policy considerations as a factor. It is recognized, however, that both domestic and foreign price data are not available immediately for the calculation of the REER. For this problem, the approach suggested by Lipschitz (1980) is followed, in which optimal weights for currencies in the basket are determined based upon the past correlation between price and exchange rates. When the optimal basket is applied to Korea since the mid-80s, it is found that the REER of the won could have been much more stable than it actually was. We also argue for the use of variable weights rather than fixed ones, which would be determined by the changing relationship between exchange rates and relative prices. The optimal basket, and the optimal basket exchange rate based on that basket, could provide an important medium- or long-term reference for proper exchange market intervention under the market average rate regime, together with other factors, such as developments in the current account balance and changes in productivity.

• KDI Journal of Economic Policy
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• v.39 no.2
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• pp.1-23
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• 2017

Korea's rapid export expansion suddenly began in the early 1960s and boosted the economy. This paper's investigation finds that it began in 1961, as new export items appeared, export of which increased incomparably faster than that of the current export items at the time. How and why of this highly unusual phenomenon can best be explained by a major reform of foreign exchange system in February 1961. This goes against the widely held view that the switch in development policy from import substitution to export promotion in the mid-1960s was the reason for Korea's export success. Rather, the evidence indicates that the rapid export expansion led to the policy switch. The government's export promotion since the policy switch helped the rapid export expansion continue into the 1970s, despite the protectionist import policy.

• Asian Journal of Business Environment
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• v.9 no.3
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• pp.5-9
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• 2019

Purpose - This paper examines whether fiscal and monetary expansion would affect output in Australia. Research design, data, and methodology - An extended IS-LM model which describes the equilibrium in the goods market and the money market is applied. The real effective exchange rate and the real stock price are included in order to determine whether there may be any substitution or wealth effect. The sample consists of Annual data ranging from 1990 to 2018. The GARCH process is used in empirical work to correct for potential autoregressive conditional heteroscedasticity. Results - Expansionary fiscal policy reduces output; whereas, expansionary monetary policy raises output. In addition, real appreciation of the Australian dollar, a lower U.S. interest rate, a higher real stock price or a lower expected inflation would increase output. The finding that expansionary fiscal policy has a negative impact on real GDP suggests that the negative crowding-out effect on private spending dominates the positive impact. Conclusions - Fiscal prudence needs to be pursued. Real depreciation of the Australian dollar hurts output. Monetary tightening in the U.S. generates a negative effect on Australia's output. A healthy stock market is conducive to economic growth as higher stock prices tend to result in the wealth and other positive effects, increasing consumption and business spending.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.2
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• pp.15-23
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• 2021

This study investigates the presence of the day-of-the-week anomaly in exchange rate for 30 developing countries with free floating exchange rate regimes using daily data from January 2, 2011 to December 31, 2019. First, we apply the GARCH panel to estimate the intraday effect for all the sampled countries. Second, we run poolability test to check whether the coefficients of the GARCH panel are the same for all countries sampled. The result of poolability test rejects the homogeneity assumption. This implies that our sample countries contain heterogeneity. Third, we apply mean-group estimation by averaging the coefficients for all individual GARCH estimations. Fourth, we divided our sample of developing countries into three groups based on capital restriction index for the reason that the effect of monetary policy on the exchange rate depends on the degree of capital account liberalization. The empirical evidence for the return equation suggests that Mondays are connected with lower volatility whereas Thursdays experiences higher return compared to Tuesdays. The lowest estimated coefficient for full sample, group 1 and group 2, is Friday, but for group 2 is Thursday. We find similar result for the volatility equations, which show that Monday returns are lower compared to Tuesday.

• International Area Studies Review
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• v.13 no.1
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• pp.103-122
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• 2009

The paper is basically designed to investigate any existence of co-movement among foreign exchange market, goods market, and monetary market implemented by relative PPP and interest rate parity. And, rational expectation and GARCH-M model are employed for an empirical application. The result revealed that since the co-movement among the markets is hardly found, an efficiency of foreign exchange market is independent from any shocks from the goods market and the monetary market. Whereas, the exchange rate is strongly effected by a real interest rate parity. To this end, the real interest rate should be a key policy instrument to stabilize the foreign exchange market.

• East Asian Economic Review
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• v.20 no.3
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• pp.365-390
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• 2016

This paper quantitatively compares the intrinsic features of the daily USD-GBP exchange rates in two different periods, the 1920s and the 2010s, under the same freely floating exchange rate system. Even though the foreign exchange markets in the 1920s seem to be much less organized and developed than in the 2010s, this paper finds that both the long memory volatility property and the structural break appear to be the common intrigue features of the exchange rates in the two periods by using the FIGARCH model. In particular, the long memory volatility properties in the two periods are found to be upward biased and overstated because of the structural breaks in the exchange markets. Thus this paper applies the Adaptive-FIGARCH model to consider the long memory volatility property and the structural breaks jointly. The main finding is that the structural breaks in the exchange markets affect the long memory volatility property significantly in the two periods but the degree of the long memory volatility property in the 1920s is reduced more remarkably than in the 2010s after the structural breaks are accounted for; thus implying that the structural breaks in the foreign exchange markets in the 1920s seem to be more significant.

• KDI Journal of Economic Policy
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• v.13 no.2
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• pp.21-39
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• 1991

This paper introduces a two-sector model to analyze the real and monetary determinants of Korea's real exchange rate. So far, most studies on Korea's exchange rate have concentrated on the behavior of nominal exchange rate, but this study proposes a dynamic model of real exchange rate behavior in developing countries and estimates the real and financial determinants of Korea's real exchange rate behavior. The estimation was performed over the period of 1980-89. The results show many interesting things. First, the monetary and fiscal expansion led to a real appreciation, which suggests that the monetary and fiscal stances be kept sound for a real depreciation. Second, the improvement in the terms of trade led to a real depreciation. This experience is in the contrast to the popular view that the improvement in the terms of trade will result in a real appreciation. Third, the productivity growth led to a real appreciation, but this effect of the Ricardo-Balassa type was not significant. Finally, the nominal devaluation was quite effective to produce a real depreciation. This result also supports Korea's exchange rate policy in the 1980s which was based upon the real target approach instead of nominal anchor approach.

• International Area Studies Review
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• v.14 no.3
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• pp.221-246
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• 2010

The paper is basically attempted to reveal a mechanism of exchange rate determination in global foreign exchange markets. For a theoretical framework, uncovered interest rate parity(UIRP), covered interest rate parity(CIRP), and real interest rate parity(RIRP) are tentatively adapted, and GARCH-M model is employed for an econometric methodology. Empirical evidence shows that the UIRP is superior to others, and the RIRP is better than the CIRP in explaining how exchange rates are determined in global exchange markets. All of them, however, is not fully supported by economic theories. Following Frankel(1989), country premium, volatility premium, and currency premium are evaluated to see if which premium is a crucial in disturbing the RIRP, and it is found that country and currency premiums are a major components in disturbing the RIRP. To this end, market-oriented and market-determined systems has to be built to avoid currency disputes which is undergoing hot issue in global foreign exchange market.

• Journal of Distribution Science
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• v.11 no.4
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• pp.81-88
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• 2013

Purpose - This paper analyzes the influence of the RMB internationalization on the KRW/dollar exchange rate using an autoregressive distributed lag model. Comparing the parameter estimators from the sample period before and after the global financial crisis, we found that the RMB/dollar exchange rate has increasingly become more influential on the KRW/dollar exchange rate. Moreover, for the past several years, the Chinese government has actively utilized the financial service FTA negotiation as a measure for the RMB internationalization. This paper simultaneously considers RMB internationalization and financial service negotiations in the Korean-Chinese FTA. The purpose of this paper is to explicitly suggest a direction for the financial service negotiations in the Korean-Chinese FTA considering the effects of RMB internationalization. Research design, data, and methodology - The research plan of this paper has two parts. First, for an empirical study, this paper uses the daily exchange rate of the U.S. dollar against the currencies of the ASEAN5, Taiwan,and Korea. By using an autoregressive distributed lag model, this paper studies the influence of the change in the RMB/dollar exchange rate on changes in the local currency/dollar exchange rate in seven economies neighboring China. Our sample periods are 06/2005 - 07/2008 and 06/2010 -02/2013. During these periods, China was under the multi-currency basket system. We exempted the period of 08/2008 - 05/2010 from the analysis because there was nearly no RMB/dollar exchange rate fluctuation during those months. Second, after analyzing the recent financial service liberalizations and deregulations in China, we recommend a direction for the financial service negotiations in the Korean-Chinese FTA. In the past several years,the main Chinese financial policy agenda has surrounded the RMB internationalization. Therefore, it is crucial to understand this in the search for strategies for the financial service negotiations in the Korean-Chinese FTA. This paper employs an existing literature survey and examines the FTA protocols in its research methodology. Results and Conclusions - After the global financial crisis, the Chinese government wanted to break away from the dollar influence and pursued independent RMB internationalization in order to continue the growth and stability of its economy. Hence, every neighboring economy of China has been strategically impacted by RMB internationalization. Nevertheless, there is little empirical study on the influence of RMB internationalization on the KRW/dollar exchange rate. This paper is one of the few studies to analyze this problem comprehensively. By using a relatively simple estimation model, we can confirm that the coefficient of the RMB/dollar exchange rate has become more significant, except in the case of Indonesia. Although Korea is not under the multi-currency basket system but under the weakly controlled floating exchange rate system, its coefficient appears as large as that of the ASEAN5. This is the basis of the currency cooperation that has grown from the expansion of trade between the two countries. These empirical results suggest that the Korean government should specifically consider the RMB internationalization in the Korean-Chinese FTA negotiations.