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Economic fundamentals and exchange rates under different exchange rate regimes: Korean experience

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Abstract

Korea provides a unique opportunity to study the different behaviors or roles, if any, of limited flexibility and free floating exchange rate regimes. Korea shifted from a limited flexibility to a free floating exchange rate regime after the 1997 economic crisis. It is well documented that the exchange rate is very difficult to predict using any theoretical models for exchange rate determination. Based on a simple monetary model, we find that the impact of economic fundamentals on the exchange rate is very similar under both exchange rate regimes according to OLS estimates, but the difference is statistically significant with GARCH(1,1) results. We also find that the size of the exchange rate shock is much bigger under the free floating regime than under the limited flexibility regime. VAR results show that the exchange rate shock impact on inflation is not statistically different under the two regimes. These findings are generally in line with Baxter and Stockman (1989) for regime neutrality.

Suggested Citation

  • Byung-Joo Lee, 2007. "Economic fundamentals and exchange rates under different exchange rate regimes: Korean experience," Journal of Applied Economics, Universidad del CEMA, vol. 10, pages 137-159, May.
  • Handle: RePEc:cem:jaecon:v:10:y:2007:n:1:p:137-159
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    Keywords

    Korean exchange rate regimes; economic fundamentals; exchange rate pass-through;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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