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BOK Working Paper No.2020-4, The Effects of Foreign Exchange Operation on Stabilization of Exchange Rate Volatility in Korea

Economic Research Institute (82-2-759-5427) 2020.02.03 3362

Title : The Effects of Foreign Exchange Operation on Stabilization of Exchange Rate Volatility in Korea
Author : Junseo Park(BOK), Kyongwook Choi(University of Seoul)

<Abstract>

If there is significant difference between a country’s motivation of foreign exchange operation and other interested countries’ perception of the motivation, it could cause serious friction among those countries. Therefore, it is necessary to precisely define the behavior of foreign exchange operation and analyze its effects on foreign exchange rate. For that reason, this paper analyzes whether Korea’s foreign exchange operation is a type of ‘leaning against the wind’ or not and whether it contributes to a decrease of exchange rate volatility or not. Central bank’s loss function and 2SLS regression were used for each analysis respectively.
The empirical estimation results show that Korea’s foreign exchange operation is a type of ‘leaning against the wind’ and has been implemented asymmetrically to the appreciation or depreciation of Korea Won against US Dollar according to the market conditions. Also, the results support that the foreign exchange operation contributes to the stabilization of exchange rate volatility.

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