The purpose of this study is to analyze to what degree changes in exchange rate affect export price, the overall relationship between export price and exchange rate, as well as the structural changes that took place after the foreign exchange crisis.
Despite the sharp decrease in exchange rate since the foreign exchange crisis, some argue that exports have continuously risen, indicating decreased exchange rate sensitivity for Korean exports. In the positive analysis, which compared the situation before and after the foreign exchange crisis, results indicated that exports were becoming less affected by the exchange rate compared to the past. In examining export price and dispersion and covariance of exchange rate, the absolute value of the correlation coefficient decreased when there was an increase in the dollar export price. Changes in exchange rate occurred because recent adjustments in export price based on the Korean Won made by exporting companies created a strong tendency to act against changes in the exchange price. A regression analysis of the exchange rate pass-through indicated that export price towards the pass-through continued to decrease.
There are several reasons that explain the significant decrease in the exchange rate pass-through after the financial exchange crisis. First, because of changes in the exchange rate system, export companies’ projections of future changes in exchange rate might have decreased the pass-through. After implementation of a flexible exchange rate system, rate fluctuation increased; thus allowing corporations to judge the change as a temporary phenomenon. Secondly, as the pass-through largely decreased in products that were a large part of the export price index, the overall export price towards the pass-through decreased. Compared to the 1980s, the exchange rate pass-through by product has decreased; but when compared to the 1990s, products with a large portion witnessed a sharp fall in the pass-through. Also, if competition with China becomes intensified in the international market, and the market power of export corporations declines, the result would be a downward shift in the change in exchange rate to export price. This trend could spread internationally. In estimating Japan’s pass-through using the same method, the exchange rate also indicated a declining pattern.
These results suggest that by adjusting the markup, export companies have been able to absorb the impact of exchange rate fluctuation, thereby playing a role in the overall lessened sensitivity of export to the exchange rate. This is particularly evident in cases where the exchange rate between the Korean Won and dollar is declining. The declining cost of the Korean won as opposed to the increasing cost of the dollar explains the strong tendency to act upon changes in exchange rate.
환율과 수출가격의 구조변화(Structural changes in exchange rate and export price)
|Series Title; No||정책포럼 / 177|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Trade|
|Holding||KDI; KDI School|