Author: Cheolbeom Park(Korea University)

<Abstract>

Using data from South Korea, this paper shows that the explanatory power of liquidity returns for the exchange rate varies over time and examines whether this unstable relationship can be explained by the scapegoat theory. This paper finds (1) that the time-varying regression has better performance to explain exchange rate movements, and (2) that the liquidity return satisfies the conditions for the scapegoat variable. The results in this paper support the validity of the scapegoat effect for exchange rate movements in South Korea.