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Economic Fundamentals on Exchange Rates under Different Exchange Rate Regimes:

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  • Byung-Joo Lee

Abstract

This paper investigates the structural differences of the free floating exchange rate regime after the economic crisis compared to the managed float exchange rate regime before the economic crisis. This paper focuses on the relationship between exchange rates and economic fundamentals. It is well documented that the exchange rate is very difficult to predict using any theoretical models for the exchange rate determination. Korean exchange rates provide one of the unique opportunities to study the different behaviors or roles, if any, of managed float and free floating exchange rate regimes. Based on the simple monetary model, we found that the Korean exchange rates are more sensitive to the economic fundamentals under the free floating regime than under the managed float regime. Exchange rate path-through into the domestic variable, especially inflation rate, has become more stable under the floating regime than under the managed regime. This finding may contradict the traditional arguments for the managed regime. However, this finding is consistent with the view that the free floating regime is better for the economic growth in the long-run. In short, the fixed or managed regimes are short-run solutions for the economic growth. Exchange rate volatilities under the flexible regime could be reduced if there is a well-functioning future’s market

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 765.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:765

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Keywords: Korean exchange rate; Flexible exchange rate regime; Exchange rate path-through;

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  1. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  3. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
  4. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  5. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  7. MacDonald, Ronald & Taylor, Mark P., 1994. "The monetary model of the exchange rate: long-run relationships, short-run dynamics and how to beat a random walk," Journal of International Money and Finance, Elsevier, vol. 13(3), pages 276-290, June.
  8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  9. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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