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Disorderly adjustments to exchange rate misalignments: The experience of Korea

Takuji Kinkyo (tk52@soas.ac.uk)
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Takuji Kinkyo: Department of Economics, SOAS University of London, UK

No 140, Working Papers from Department of Economics, SOAS University of London, UK

Abstract: This paper analyzes Korea’s exchange rate dynamics before and during the crisis of 1997-98 by estimating the long-run fundamental exchange rate and the associated error correction model. The analysis suggests that although Korea’s exchange rate was substantially overvalued before the crisis, the subsequent exchange rate dynamics could not fully be accounted by the need to correct misalignments. It was found that there was a large deviation from the short-run fundamental value of exchange rates, indicating the presence of “overshooting of the overshooting equilibrium†during the crisis. The findings have important policy implications for crisis management in emerging market economies.

Keywords: Exchange rate misalignments; Overshooting; Crisis; Small open economy; Autoregressive distributed lag model; Error correction model. (search for similar items in EconPapers)
JEL-codes: C22 C32 F31 F32 F41 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2004-08
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Citations: View citations in EconPapers (2)

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