The Role of Unobservable Fundamentals in Korea Exchange Rate Fluctuations: Bayesian Approach
Young Min Kim () and
Seojin Lee ()
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Young Min Kim: Department of Economics, Korea University
Seojin Lee: School of Finance, Shanghai Lixin University
Economic Analysis (Quarterly), 2017, vol. 23, issue 3, 1-22
Recent literature emphasizes the role of unobservable fundamentals in exchange rate movements. Within the state-space model and the Bayesian approach, proposed by Balke et al. (2013), we find that unobservable fundamentals, such as the risk premium, the deviation from the purchasing power parity, and money demand shifters explain most of the Korea exchange rate fluctuations. In contrast, observed monetary fundamentals have much less effect. This result implies that Korean exchange rate movements are closely related to market expectations or sudden capital flows, rather than economic fundamentals.
Keywords: Bayesian MCMC algorithm; Exchange rate; Unobservable fundamentals; Currency risk premium; Capital flows (search for similar items in EconPapers)
JEL-codes: C11 F3 (search for similar items in EconPapers)
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