This study suggests basic guidance for Korea’s exchange rate system and exchange rate management.
In the Korean economy, the government places a policy focus on stable growth, tries to establish a competition system for domestic industries, and tries to improve corporate fundamentals through market openings. In the process of opening up the domestic market, a country’s exchange rate system has a significant impact on its economy.
Currently, Korea’s exchange rate system is a dual currency basket which is relatively close to an optimal model for developing countries. Under the dual currency basket, the Special Drawing Rights (SDR) basket is operating along with Korea’s own basket. This system is characterized by its reduction of the effect that exchange rate fluctuations of individual foreign currency in baskets can have on the value of Korean won, as well as allowing for intervention by the exchange rate authority in the case of temporary external shocks. According to our analysis, Korea should maintain the existing method of managing exchange rates, for the time being.
We analyzed how exchange rates and the international balance of payments move under the current exchange rate system. The empirical analysis was based on monthly data from February 1980 to July 1983. We attempted empirical analyses by attempting a regression equation that treats composite variables of international balance and exchange rates as dependent variables, and foreign countries’ prices, income, and domestic credit as exogenous variables. Our analyses utilized balance requirements for currency market and evaluation criteria for purchasing power for tradable goods.
The result of regression analyses approached the theoretical model. According to the model, if domestic credit increases in an exogenous manner, the resulting excess of credit that exceeds an increase in currency. Demand is reduced through the window of international balance of payments, thereby reducing currency supply. However, depreciation of domestic currency increases prices in the domestic market by increasing prices for domestic tradable goods. As a result, nominal currency demand increases, thereby helping balance the currency market.
In an open economy, it is important for monetary policymakers to understand the mechanism in which domestic credit is created and how it systematically affects changes in international balance of payments and exchange rates.
개도국 환율제도의 모형과 한국의 환율운용방향(Exchange rate system model for developing countries and Korea’s direction of exchange rate management)
|Series Title; No||정책연구시리즈 / 85-04|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < General|
|Holding||KDI; KDI School|