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Sources of Fluctuations of the Real Exchange Rate of Korea and Equilibrium Real Exchange Rate

Economic Research Institute 2004.08.10 3937

Sources of Fluctuations of the Real Exchange Rate of Korea and Equilibrium Real Exchange Rate by a Long-Run Restriction VAR Model(Vol.7 No.1)


Myoungchul Chung
:Instructor at Economics Departments of Ehwa Woman's University and Seoul City University(Tel: 02-542-4548, E-mail: mchung2@hanmail.net). I give thanks to two anonymous referees of the paper and the editing committee of "Economic Papers" at the Bank of Korea.

Assuming no long-run effects of monetary shocks on the real exchange rate, this paper examines the long-run effects of real domestic and foreign macroeconomic shocks on the real exchange rate based on a long-run restriction structural VAR methodology. In this paper, yen/dollar exchange rate shock is especially chosen as a foreign shock because of its assumed importance for the external competitiveness of Korea during the covered period.
The long-run effects of real shocks on the real exchange rate become the  basis for calculating a kind of equilibrium real exchange rate and the deviations of the real exchange rate from the equilibrium real exchange rate are compared to the current account's movements.
In particular, the deviations of the real exchange rate in the period of 1995Q3-1997Q3 show overvaluation of the real exchange rate and are positively correlated to current account deficits. Such overvaluation of the real exchange rate appears due to the sluggish adjustment of the real exchange rate to the sharply depreciated equilibrium real exchange rate owing to  yen/dollar exchange rate shocks, and also to the monetary shocks that caused a temporary appreciation of the real exchange rate.

      JEL Classification Number: F3
      Key words: long-run restriction structural VAR, real exchange rate, equilibrium
      real exchange rate, yen/dollar exchange rate shock, real shock, monetary shock

 

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