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Economic Fundamentals on Exchange Rates under Different Exchange Rate Regimes

Byung-Joo Lee ()

No 765, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: This paper investigates the structural differences of the free floating exchange rate regime after the economic crisis compared to the managed float exchange rate regime before the economic crisis. This paper focuses on the relationship between exchange rates and economic fundamentals. It is well documented that the exchange rate is very difficult to predict using any theoretical models for the exchange rate determination. Korean exchange rates provide one of the unique opportunities to study the different behaviors or roles, if any, of managed float and free floating exchange rate regimes. Based on the simple monetary model, we found that the Korean exchange rates are more sensitive to the economic fundamentals under the free floating regime than under the managed float regime. Exchange rate path-through into the domestic variable, especially inflation rate, has become more stable under the floating regime than under the managed regime. This finding may contradict the traditional arguments for the managed regime. However, this finding is consistent with the view that the free floating regime is better for the economic growth in the long-run. In short, the fixed or managed regimes are short-run solutions for the economic growth. Exchange rate volatilities under the flexible regime could be reduced if there is a well-functioning future’s market

Keywords: Korean exchange rate; Flexible exchange rate regime; Exchange rate path-through (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ifn
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