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Measuring Misalignments in the Korean Exchange Rate (ROK Economic System Series No.19)

Author

Listed:
  • Saang Joon Baak

    (Waseda University)

Abstract

This paper measures to what extent the real effective exchange rate of the Korean won is misaligned from its equilibrium value by estimating the equilibrium value using the behavioral equilibrium exchange rate (BEER) approach. The economic fundamentals such as the terms of trade, the relative price of non-traded to traded goods, net foreign assets and real interest rate differentials are employed to assess the equilibrium exchange rate. Considering the drastic changes in Korea's trade pattern, the trade partner weights, which are used to compute the real effective exchange rate, are not fixed, but variable. The estimation results using the quarterly data from 1982Q1 to 2009Q4 indicate that the actual exchange rate of the Korean won was substantially overvalued for the period from 2005Q1 to 2007Q4, and substantially undervalued for the period from 2008Q2 to 2009Q3. The actual exchange rate deviates from the BEER and from the long-run equilibrium (or sustainable value) of the BEER by 32 percent and by 24 percent respectively in 2008Q4.

Suggested Citation

  • Saang Joon Baak, 2011. "Measuring Misalignments in the Korean Exchange Rate (ROK Economic System Series No.19)," Discussion papers 1102e, ERINA - Economic Research Institute for Northeast Asia.
    • Handle: RePEc:eri:dpaper:1102e
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Korean won; misalignment; behavioral equilibrium exchange rate;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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