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Disorderly adjustments to exchange rate misalignments: The experience of Korea

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  • Takuji Kinkyo

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

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.

Suggested Citation

  • Takuji Kinkyo, 2004. "Disorderly adjustments to exchange rate misalignments: The experience of Korea," Working Papers 140, Department of Economics, SOAS, University of London, UK.
  • Handle: RePEc:soa:wpaper:140
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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file28839.pdf
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
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    3. repec:crs:wpaper:9645 is not listed on IDEAS
    4. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
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    8. Takuji Kinkyo, 2004. "The case for regional exchange rate arrangement in East Asia," Working Papers 141, Department of Economics, SOAS, University of London, UK.
    9. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
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    11. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    12. 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.
    13. P. Bernd Spahn, 1995. "International Financial Flows and Transactions Taxes; Survey and Options," IMF Working Papers 95/60, International Monetary Fund.
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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.

    More about this item

    Keywords

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

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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