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East Asian Economic Review Vol. 7, No. 2, 2003. pp.113-153.Number of citation : 0
Kwon Sik Kim
Korea Institute for International Economic Policy (KIEP)
EAER is an open access journal distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license.
This paper examines the effects of two types of uncertainty related to the real effective exchange rate (REER) in Korea for export trends. To decompose uncertainties into two types of component, I propose an advanced generalized Markov switching model, as developed by Hamilton (1989) and then expanded by Kim and Kim (1996). The proposed model is useful in uncovering two sources of uncertainty: the permanent component of REER and the purely transitory component. I think that the two types of uncertainties have a different effect on export trends in Korea. The transitory component of REER has no effect on the export trend at 5-percent significance, but the permanent component has an effect at this level. In addition, the degree of uncertainty, consisting of low, medium and high uncertainty in the permanent component, and low, medium and high uncertainty in transitory component of REER, also has different effects on export trends in Korea. Only high uncertainty in permanent components effects export trends. The results show that when the policy authority intends to prevent the shrinkage of exports due to the deepening of uncertainties in the foreign exchange market, the economic impacts of its intervention could appear differently according to the characteristics and degree of the uncertainties. Therefore, they imply that its economic measures, which could not grasp the sources of uncertainties properly, may even bring economic costs.
JEL classification: F31, F37
Exchange Rate Uncertainty, Korea, Export, Markov Switching Model, Kalman Filter, Markov-switching