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Exchange rate movements in Korea : Evaluation and policy implications

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  • Exchange rate movements in Korea
  • Cho, Dongchul
  • Korea Development Institute
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Title Exchange rate movements in Korea
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Sub Title

Evaluation and policy implications

Material Type Reports
Author(English)

Cho, Dongchul

Publisher

Seoul:Korea Development Institute

Date 1996
Language English
File Type Link
Subject Economy < Trade
Holding Korea Development Institute

Abstract

1. The new exchange rate system seems to properly reflect market forces.
1) The REER and the current account in the 1990s have been more stable than in the 1980s.
2) Unlike the 1980s, the exchange rate tends to revert to the PPP rate.

2. Given the current level of capital inflows, the exchange rate in the 1990s seems to be near the level that is consistent with the external balance.
1) The exchange rate that would lead the current account balance appears to be approximately 3-5 percent higher than the actual rate in ,1995
2) The depreciation pressures due to the current account deficit appears to be roughly in balance with the appreciation pressures due to the capital inflows
3. The current pace of the capital market opening may be manageable without causing serious macro-problems to the Korean economy, but the commitment of the full-scale liberalization of capital markets should be made with caution.
1) The current level of deficit (less than 2-6 percent of GDP) appears to be sustainable without causing a debt crises
2) A drastic full-scale opening of capital markets is likely to induce huge (approximately 15 percent) appreciation pressures in the short-run.
3) With the downward trend of the real interest rate in Korea, a gradual pace of liberalization seems to help relieve the appreciation ressures and the resulting short-run recessions.
4) With the gradual capital market liberalization process, policy efforts to reduce the rate of inflation are also necessary to lower the nominal interest rate.