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Disorderly adjustments to exchange rate misalignments: The experience of Korea

  • Takuji Kinkyo

    ()

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

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    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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    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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    Web page: http://www.soas.ac.uk/economics/

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    1. Graciela L. Kaminsky & Carmen Reinhart & Carlos A. Vegh, 2003. "The Unholy Trinity of Financial Contagion," NBER Working Papers 10061, National Bureau of Economic Research, Inc.
    2. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521008051, October.
    3. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
    4. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
    8. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
    9. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    10. 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.
    11. P. Bernd Spahn, 1995. "International Financial Flows and Transactions Taxes; Survey and Options," IMF Working Papers 95/60, International Monetary Fund.
    12. repec:crs:wpaper:9645 is not listed on IDEAS
    13. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    14. 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.
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