The Stabilizing Effects of Active KRW-JPY Transactions on KRW Exchange Rate Movements

Author: Sangwon Suh(Senior Economist, Monetary Policy Analysis Team, The Bank of Korea)

While there are customer foreign exchange transactions involving the
Korean Won and the Japanese Yen in Korea, inter-bank KRW-JPY foreign
exchange transactions do not take place through a formal exchange. It is
demonstrated theoretically in this paper that active inter-bank KRW-JPY
transactions would change the dynamics of the KRW exchange rate. The
results from the analysis show that the KRW exchange rate would be more
stable with a liquid inter-bank FX market for KRW-JPY transactions than
they are without such a market, in terms of both the deviation from the
desired exchange rate level and exchange rate volatility.