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Autonomous Stability Mechanism of Won/Dollar Foreign Exchange Rate through Lagged Own Volatility (in Korean)

Author

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  • Yun-Yeong Kim

    (Dankook University)

Abstract

This paper theoretically explains that the volatility of foreign exchange rate may enhance the stability of foreign exchange rate through the in and ouflows of foreign investments. According to the empirical analyses, there might be a mechanism to decrease the exchange rate through the influx of foreign investment after the increase of Won/Dollar foreign exchange rate multiplied by its lagged volatility for the data of after Asian crisis. However, we can not find any similar mechanism using the data of the before Asian crisis but there is an error correction mechanism reflecting the adjustment process reflecting the current account balance recovery. This kind of estimation results imply that any foreign exchange intervention to mitigate the large volatility of exchange rate should consider this kind of market-based stabilizing mechanism in advance. That is, if foreign exchange intervention is conducted without regarding this autonomous stability mechanism may enlarge the amplitude of exchange rate variation. Further more such a policy may waste the foreign reserve ineffectively, which is made to prevent the foreign exchange crisis.

Suggested Citation

  • Yun-Yeong Kim, 2010. "Autonomous Stability Mechanism of Won/Dollar Foreign Exchange Rate through Lagged Own Volatility (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 16(4), pages 51-87, December.
    • Handle: RePEc:bok:journl:v:16:y:2010:i:4:p:51-87
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    More about this item

    Keywords

    Foreign exchange rate; Foreign investment inflow; Prospective theory; Error correction mechanism; Autonomous stability mechanism;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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