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Analysis of Short-term Exchange Rate Movements in Korea: Application of an Extended Mundell--Fleming Model

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Yu Hsing

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Abstract

Extending the Mundell--Fleming model and applying the Newey--West HAC method, this paper finds that the real USD/won exchange rate is negatively affected by real M2, the world interest rate, country risk, the expected inflation rate and the binary variable for the time period during the Asian financial crisis, and positively influenced by the stock market performance and the lagged dependent variable. The coefficient of real government deficit spending is positive but insignificant at the 10% level. Therefore, to maintain the stability of the won, the authorities need to pursue expansionary monetary and fiscal policies with caution, nurture a positive business and investment environment to reduce country risk, maintain a healthy stock market, and enhance the central bank's credibility to lower inflation expectations.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Global Economic Review.

Volume (Year): 35 (2006)
Issue (Month): 2 (June)
Pages: 145-151
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Handle: RePEc:taf:glecrv:v:35:y:2006:i:2:p:145-151

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Related research
Keywords: Mundell--Fleming model; country risk; monetary and fiscal policy; world interest rate; stock market performance;

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  10. Dekle, Robert & Hsiao, Cheng & Wang, Siyan, 2001. " Do High Interest Rates Appreciate Exchange Rates during Crisis? The Korean Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(3), pages 359-80, July. [Downloadable!] (restricted)
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  14. Maurice Obstfeld, 2001. "International Macroeconomics: Beyond the Mundell-Fleming Model," NBER Working Papers 8369, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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