The purpose of this study is to examine problems that are faced when measuring the real effective exchange rate and recommend an adequate index that reflects the rate.
The real effective exchange rate, which is used to evaluate the actual float of the Korean Won or measure the variation force of our product cost in the international market, has been utilized in various ways; however, different experts disagree on which factors to select. There is also concern that the different usage creates confusion. In most cases, the real effective exchange rate is measured quarterly or yearly, eliciting the other concern of information timeliness.
In order to create an adequate index of the monthly real effective exchange rate, different components were compared and considered with the international balance of payments. It was found that first, in selecting the weight, it was better to use an adjusted weight rather than a fixed weight. Second, incorporating trading partners into the equation, while somewhat helpful in explaining the relationship between the international balance of payments and real effective exchange rate, was not conclusive in this respect. Third, the consumer price index significantly affected the real effective exchange rate. Fourth, it was better to select a datum point by using a regression equation that could balance out the current account in the period analysis as this resulted in less distortion. Fifth, based on the analysis made on the datum point, in 1985-88, the Korean Won was underestimated in comparison to other trading partners; and in 1991-91 and 1995-97, the Korean Won was relatively overvalued during these periods.
From these perspectives, it can be concluded that Korea’s exchange rate policy was weak in that it fluctuated depending on the exchange rates of its trading partners.
원화의 실질실효환율에 대한 재검토(Reexamining the real effective exchange rate of the Korean Won)
|Series Title; No||KDI 정책포럼 / 제135호|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Macroeconomics|
|Holding||한국개발연구원; KDI 국제정책대학원|