Fear of currency appreciation following capital inflows and the like in emerging market countries has persisted on the basis of expectations that a fall in the exchange rate will, by pushing up export prices and lowering import prices, essentially bring about a worsening of the nation’s current account position and consequently have a negative impact on economic recovery. However, no specific consensus has yet been reached on these transmission channels and their size. In this respect, accurate estimation of the levels and
patterns of exchange rate pass-through, or the effect of exchange rate fluctuations on export prices, can be seen as a sine qua non for improving the effectiveness of macroeconomic policy.

    This study points out the increase in the proportion of imports in intermediate inputs, along with the increased external dependency of the Korean economy, and also presents an exchange rate pass-through model that clearly reflects how the import dependency of intermediate inputs on the cost side, in addition to markups, affects exchange rate pass-through. Moreover, an empirical analysis is carried out, based on a theoretical model and with use of data on the Korean economy.

    According to the results of the estimation, the exchange rate pass-through rate was high and showed clear asymmetry caused by rises and falls in the exchange rate during the pre foreign-currency crisis period (1985~1995) when the import dependency of intermediate inputs was relatively low. During the post-crisis period(1999~2012) when import dependency of intermediate inputs increased, meanwhile, the exchange rate pass-through rate fell significantly and showed nonlinearity, not asymmetry, absorbing slight fluctuations in the exchange rate and responding to only very large fluctuations.

    These results of the empirical analysis suggest that, in macroeconomic policy operation, there is unlikely to be any serious detraction from real economic stability when exchange rate fluctuations are tolerated within a certain range.