Measuring the Degree of Currency Misalignment Using Offshore Forward Exchange Rates: The Case of the Korean Financial Crisis
AbstractThis paper proposes a new method of measuring the degree of currency misalignment through the use of offshore forward exchange rates. Using default risk adjusted noarbitrage conditions for forward exchange contracts, we calculate the spot exchange rates and the domestic interest rates that are implied from the observed forward exchange rates. The difference between the implied and the observed spot exchange rates is our measure of currency misalignment. Our methodology is based on the presumption that, during a currency crisis, offshore forward exchange rates reflect market sentiments more closely than onshore spot and forward exchange rates. The latter are usually tightly regulated and heavily affected by government intervention during a nonnormal event such as a financial crisis. We apply the method to the Korean financial crisis in 1997 and discuss its implication for evaluating the IMF adjustment program and explaining foreign capital flows.
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Bibliographic InfoPaper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 470.
Length: 37 pages
Date of creation: May 2000
Date of revision:
Contact details of provider:
Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.
currency misalignment; covered interest parity; nonderiverable forwards; Korean financial crisis;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-05-16 (All new papers)
- NEP-FMK-2000-05-16 (Financial Markets)
- NEP-IFN-2000-05-16 (International Finance)
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