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Disorderly adjustments to exchange rate misalignments: The experience of Korea

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  • Takuji Kinkyo

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    (Department of Economics, SOAS, University of London, UK)

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    Abstract

    This paper analyzes Korea’s exchange rate dynamics before and during the crisis of 1997-98 by estimating the long-run fundamental exchange rate and the associated error correction model. The analysis suggests that although Korea’s exchange rate was substantially overvalued before the crisis, the subsequent exchange rate dynamics could not fully be accounted by the need to correct misalignments. It was found that there was a large deviation from the short-run fundamental value of exchange rates, indicating the presence of “overshooting of the overshooting equilibrium†during the crisis. The findings have important policy implications for crisis management in emerging market economies.

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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file28839.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, SOAS, University of London, UK in its series Working Papers with number 140.

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    Length: 37 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:soa:wpaper:140

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    Related research

    Keywords: Exchange rate misalignments; Overshooting; Crisis; Small open economy; Autoregressive distributed lag model; Error correction model.;

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    1. repec:fth:inseep:9645 is not listed on IDEAS
    2. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading And Exchange Rate Regimes," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 537-569, May.
    3. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
    4. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
    5. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2003. "The unholy trinity of financial contagion," MPRA Paper 13878, University Library of Munich, Germany.
    6. P. Bernd Spahn, 1995. "International Financial Flows and Transactions Taxes," IMF Working Papers 95/60, International Monetary Fund.
    7. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
    8. Takuji Kinkyo, 2004. "Transmission channels of capital flow shocks: why Korean crisis was so severe," Working Papers 139, Department of Economics, SOAS, University of London, UK.
    9. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
    10. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
    11. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    12. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-77, September.
    13. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    2. Takuji Kinkyo, 2004. "Transmission channels of capital flow shocks: why Korean crisis was so severe," Working Papers 139, Department of Economics, SOAS, University of London, UK.

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