Post-Crisis Foreign Exchange Market of Korea: Decomposition of Financial and Real Factors (in Korean)

This paper estimates the post†crisis foreign exchange market of Korea in which the exchange rate and current account (= net capital outflow) are simultaneously determined by the interaction between financial market (net capital outflow curve) and real market (current account curve). The results are: (i) the exchange rate is greatly influenced by financial market factors in the short run, but eventually determined by real market factors; (ii) exchange rate depreciation does appear to suppress capital outflow, supporting the hypothesis that won†denominated assets are not perfect substitutes for foreign currency denominated assets; nevertheless, (iii) capital outflow is estimated to be very sensitive to the exchange rate fluctuation, suggesting that a massive amount of foreign currency transactions is required to control the exchange rate by market interventions. The decomposition of the exchange rate and current account fluctuations into financial and real factors seems to help systematically understand the post†crisis situations of Korea’s foreign exchange market.