Natural Equilibrium Real Exchange Rate in Korea

Changmo Ahn

doi:10.11644/KIEP.JEAI.2006.10.2.157

Article View

East Asian Economic Review Vol. 10, No. 2, 2006. pp. 47-68.

DOI https://dx.doi.org/10.11644/KIEP.JEAI.2006.10.2.157

Number of citation : 0

Download
263

Natural Equilibrium Real Exchange Rate in Korea

Author
Changmo Ahn	Gyeongsang National University cmahn@gsnu.ac.kr

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.

Abstract

This paper defines an equilibrium time path of the real effective exchange rate of the Korean won. Once we know the equilibrium real exchange rate of the Korean won, we can calculate the degree of its misalignment. An estimate of the NATREX (NATural Real EXchange rate) model shows that the real exchange of the Korean won has a strong long run relationship with key economic fundamentals, such as total factor productivity, the input factor of raw material import, terms of trade, the world real interest rate and the population dependency ratio. Results also indicate that the Korean won shows cyclical movements of overvaluation and undervaluation in turn, rather than a systematic misalignment in one direction. Specifically, the Korean won was overvalued by 3.2% in 2006:Q1. Considering the cyclical pattern of misalignment, systematic intervention in the foreign exchange market does not seem to be desirable, except for unusual cases.

JEL classification: F31, F36

Keywords

NATREX, Equilibrium Real Exchange Rate, Misalignment, Korean won

Language

Korean

References

Kang, S. M. and S. Y. Joo. 2004. “Real Exchange Rate Misalignment in Korea, Singapore and Thailand-Using two different real exchange rates?" Journal of Money & Finance, vol. 18, no. 2, pp. 1-28. (in Korean)
Ahn, Changmo. 1996. "Imported Input Price, the Current Account and Macroeconomic Adjustment," Korean Economic Review, vol. 12. no. 1, pp. 77-99.
Ahn, Changmo, Lee, Eung-Baek, and Euy-Hoon Suh. 2002. "Noise Trading in the Korean Foreign Exchange Market: Some Questionnaire Evidence," Bank of Korea Economic Papers, vol. 5, no. 2, pp. 133-155.
Ahn, Changmo, Fane, George., and EuyHoon Suh. 2004. "Forex Dealers’ Perspectives on Exchange Rate Determination in Korea," Economic Papers, vol. 23, no. 2, pp. 140-151.
Ahn, Changmo, Kim, Hong-Bum. and Dongkoo Chang. 2006. "Is East Asia Fit for an Optimum Currency Area?: An Assessment of the Economic Feasibility of a Higher Degree of Monetary Cooperation in East Asia," Developing Economies, vol. 44, no. 3, pp. 288-305.
Barro, Robert and Jong-wha Lee. 2001. "International Data on Educational Attainment, Updates and Implications," Oxford Economic Papers, vol. 53, no. 3, pp. 541-563.
Bernanke, Ben S, and Refet S. Gurkaynak. 2001. "Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously," In Ben Bernanke and Kenneth Rogoff ed. NBER Macroeconomics Annual 2001. Cambridge: MIT Press. pp. 11-57.
Blundell-Wignall, A, and R. G. Gregory. 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countrie: The Case of Australia and New Zealand," OECD Economics and Statistics Department Working Paper 83. OECD: Paris.
Bosworth, Barry, and Susan M. Collins. 2003. "The Empirics of Growth: An Update," Working Paper. Washington, D.C: Brookings Institution.
Clark, P. B., and Ronald MacDonald. 1999. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs," In Ronald MacDonald. and Jerome L. Stein. ed. Equilibrium Exchange Rates, Ch. 10. London: Kluwer Academic Publishers.
Duval, Romain. 2002. "What Do We Know about Long Run Equilibrium Real Exchange Rates? PPP vs. Macroeconomic Approaches," Australian Economic Papers, vol. 41, no. 4, pp. 382-403.
Dvornak, Nikola, Kohler, Marion and Menzies Gordon. 2003. "Australia’s MediumRun Exchange Rate: A Macroeconomic Balance Approach," Research discussion Paper 200303. Sydney: Reserve Bank of Australia.
Ellis, Luci. 2001. "Measuring the Real Exchange Rate: Pitfalls and Practicalities," Reserve Bank of Australia Research Discussion Paper No. 2001-04. Sydney: Reserve Bank of Australia.
Gruen, D. W. R, and J. Wilkinson. 1994. "Australia’s Real Exchange RateIs it Explained by the Terms of Trade or by Real Interest Differentials?" Economic Record, vol. 70, no. 209, pp. 203-219.
Gylfason, Thorvaldur. 2002. "The Real Exchange Rate Always Floats," Australian Economic Papers, vol. 41, no. 4, pp. 369-381.
Isard, P, and H. Faruqee. 1998. "Exchange Rate Assessment: Extensions of the Macroeconomic Balance Approach," IMF Occasional Paper no. 167. Washington, D.C.: International Monetary Fund.
Mark, Nelson C. 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, vol. 85, no.1, pp. 201-218.
Meese, Richard A. and Kenneth Rogoff. 1983 "Empirical Exchange Rate Models of the Seventies, Do They Fit Out of Sample?" Journal of International Economics, vol. 14, issues 1-2, pp. 3-24.
Rosensweig, Jeffrey A. 1987. "Exchange Rate Index Construction, with a US Dollar Application," Journal of Foreign Exchange and International Finance, vol. 1, no. 3, pp. 293-301.
Stein, Jerome L, 2002. "Enlargement and the Value of the Euro," Australian Economic Papers, vol. 41, no. 4, pp. 462-479.
Stein, Jerome L. and Guay C. Lim. 2002. "Introduction to ‘Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications." Australian Economic Papers, vol. 41, no. 4, pp. 329~341.
US Treasury. 2006. April 21. "Statement by the G-7 Finance Ministers and Central Bank Governors." Washington, D. C.[Online Available: http://www.g8.utoronto.ca/finance/fm060421.htm ).
Williamson, J. 1994. Estimating Equilibrium Exchange Rates. Washington, D.C.: Institute for International Economics.