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A Framework for Exchange Rate Policy in Korea

Author

Listed:
  • 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.

Suggested Citation

  • Michael Dooley & Rudi Dornbusch & Yung Chul Park, 2002. "A Framework for Exchange Rate Policy in Korea," Finance Working Papers 21757, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:21757
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    File URL: http://www.eaber.org/node/21757
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Maurice Obstfeld, 2007. "The Renminbi fs Dollar Peg at the Crossroads," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, pages 29-56.
    2. Gab‐Je Jo, 2011. "Analysis Of International Reserve Hoarding In Korea," Pacific Economic Review, Wiley Blackwell, vol. 16(2), pages 154-167, May.
    3. repec:eee:reveco:v:53:y:2018:i:c:p:57-70 is not listed on IDEAS
    4. Lee, Minsoo, 2005. "Asian Financial Crisis and Exchange Rate Pass-Through in Korea," Review of Applied Economics, Review of Applied Economics, vol. 1(1).

    More about this item

    Keywords

    monetary policy; exchange rate regime; Korea; government;

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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