Disorderly adjustments to exchange rate misalignments: The experience of Korea
This paper analyzes Koreaâ€™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 Koreaâ€™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 â€œovershooting of the overshooting equilibriumâ€ during the crisis. The findings have important policy implications for crisis management in emerging market economies.
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