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A Framework for Exchange Rate Policy in Korea

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  • Michael Dooley

    (KIEP - Korea Institute for International Economic Policy)

  • Rudi Dornbusch
  • Yung Chul Park

Abstract

The monetary policy and exchange rate regime that served Korea well for many years ended in crisis in 1997. The regime that collapsed was characterized by a tightly managed nominal exchange rate and domestic financial markets that were controlled by the government and largely closed to international transactions. The practical question for authorities over the next few years is what monetary and exchange rate regime will best promote the objectives of maintaining economic and financial stability as financial markets are liberalized. Our basic proposal is that the powerful policy tool, interest rate policy, be used to attain a "flexible" inflation target. Flexibility in this context means that the authorities also care about short-run fluctuations in domestic output and employment. The less powerful policy tool, sterilized intervention in the foreign exchange market, would be used to limit day to day changes in exchange rates. We argue that the government should continue to be an important participant in the foreign exchange market but not attempt to establish a level for the exchange rate. Our proposal will involve intervention that is triggered by exchange rate volatility but constrained by an announced target for the government's overall net foreign asset position. The objective of this regime is to allow the government to participate in the foreign exchange market in a way that contributes to economic stability and promotes the development of the private sector's participation in foreign exchange and financial markets.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 21757.

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Date of creation: Mar 2002
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Handle: RePEc:eab:financ:21757

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Related research

Keywords: monetary policy; exchange rate regime; Korea; government;

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  2. Mill, John Stuart, 1848. "Principles of Political Economy (V): On the Influence of Government," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 5, number mill1848-5.
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  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
  7. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, vol. 66(2), pages 415-444, December.
  8. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries: Filling in the "Hollow Middle"?," Center for Development Economics 167, Department of Economics, Williams College.
  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  10. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries," IMF Working Papers 01/170, International Monetary Fund.
  11. Mill, John Stuart, 1848. "Principles of Political Economy (IV): Influence of the Progress of Society," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 4, number mill1848-4.
  12. Mill, John Stuart, 2008. "Principles of Political Economy and Chapters on Socialism," OUP Catalogue, Oxford University Press, number 9780199553914 edited by Riley, Jonathan, September.
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Cited by:
  1. Lee, Minsoo, 2005. "Asian Financial Crisis and Exchange Rate Pass-Through in Korea," Review of Applied Economics, Review of Applied Economics, vol. 1(1).
  2. Obstfeld, Maurice, 2006. "The Renminbi's Dollar Peg at the Crossroads," CEPR Discussion Papers 5771, C.E.P.R. Discussion Papers.
  3. Gab‐Je Jo, 2011. "Analysis Of International Reserve Hoarding In Korea," Pacific Economic Review, Wiley Blackwell, vol. 16(2), pages 154-167, 05.

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