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Journal ArticleDOI

Disorderly adjustments to the misalignments in the Korean won

10 Jan 2007-Cambridge Journal of Economics (Oxford University Press)-Vol. 32, Iss: 1, pp 111-124

AbstractThis paper estimates the equilibrium exchange rates for Korea's real effective rates using Clark and MacDonald's (1999) behavioural equilibrium exchange rate (BEER) approach. The estimation result suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997-98. The subsequent adjustment, however, was disorderly in the sense that the real exchange rate overshot its long-run equilibrium value. There was also a large deviation from the BEER, indicating that the sharp depreciation was not an equilibrium phenomenon.

Topics: Exchange rate (58%), Currency crisis (52%)

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Citations
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Journal ArticleDOI
Abstract: The Washington Consensus emphasizes the economic costs of real exchange rate distortions. However, a sizable recent empirical literature finds that undervalued real exchange rates help countries to achieve faster economic growth. This paper shows that recent findings are driven by inappropriate homogeneity assumptions on cross-country long-run real exchange rate behavior and/or growth regression misspecification. When these problems are redressed, the empirical results for a sample of 63 developing countries suggest that deviations of the real exchange rate in either direction from the value that is consistent with external and internal equilibriums reduce economic growth. Deviations from Balassa–Samuelson adjusted purchasing power parity on the other hand do not seem to matter for growth performance. The real exchange rate should thus be consistent with external and internal balances irrespective of implied purchasing power parity benchmarks.

51 citations


Journal ArticleDOI
Abstract: This paper examines the equilibrium real exchange rate and real exchange rate misalignments in developing Asian countries during the period 1995-2008. In addition, the relationship between real exchange rate misalignment and export performance is investigated. In the lead-up to the 1997-1998 financial crisis, real exchange rate exhibited persistent overvaluation in the crisis-affected countries. After the crisis, real exchange rate undervaluation was evident in many Asian countries such as People’s Republic of China (PRC), Malaysia, and Thailand. This study also shows that real exchange rate misalignment could have a negative impact on export performance in developing Asia. With its implications on economic activity, monitoring real exchange rate equilibrium and misalignment is a useful tool for governments/central banks to ensure balance in the economy.

32 citations


Cites background or methods from "Disorderly adjustments to the misal..."

  • ...Indonesia Sahminan (2005) BEER ( 993Q –2005Q2) TOT, productivity, real interest rate differentials, NFA 0% overvaluation in 996– 997 Korea Kinkyo (2008) BEER ( 98 Q –2000Q3) Net foreign asset, TOT, real interest rate differential, productivity differential, fiscal balance 0% overvaluation in 996Q –…...

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  • ...Kinkyo (2008) applies the 10 | ADB Economics Working Paper Series No. 151 BEER approach in determining the equilibrium RER in 1981Q1–2000Q3....

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Dissertation
01 Jan 2015
Abstract: The aim of this thesis is three-fold. First, in contrast to developed exporting countries such as Australia, New Zealand and Canada, Middle East oil exporting countries are years behind achieving the prerequisites for floating exchange rate and Inflation Targeting monetary regime. On the other hand, their performance under fixed exchange rate (to the US dollar) has brought them some painful experience such as the Dutch Disease and high inflation. For a sample of five of these countries -- Qatar, Oman, Kuwait, Saudi Arabia and the UAE -- we conduct a set of counterfactual experiments. We empirically simulate government consumption expenditure, under a hypothetical peg to a nominal anchor (oil price in either the radical or moderate version) or to a basket (containing the US Dollar, Yen and the Euro) and compare this simulation with whatever exchange rate regime each country actually followed. We find that lower volatility of real oil price in local currency causes lower volatility in government expenditure and fiscal balance as a share of GDP. Hence, we face a less volatile economy. Second, we determine the equilibrium exchange rate (using BEER) of these five oil exporting countries in the Persian Gulf which depend heavily on exports of oil, natural gas and oil products. We employ a new data set for the real effective exchange rate of these countries which is updated annually and covers the period from 1980 to 2011. Given the limited length of the sample (32 years) and low power of individual country by country tests for unit root and cointegration, estimating separate equations for each country (time series) does not provide us with precise results; therefore, to increase the efficiency of the estimators, we employ panel analysis. We apply the pooled mean-group (PMG) of Pesaran et al. (1999) and four more panel estimators for a robustness check. All estimators strongly support the positive effect of real oil price on the real effective exchange rate (i.e. higher real oil price leads to appreciation of the real effective exchange rate) which is consistent with theoretical predictions and with previous studies for commodity (oil) exporting countries. The productivity deferential elasticity is 0.10 which is consistent with the results of the related literature such as the studies of MacDonald and Ricci (2004) for South Africa, and of Lee et al. (2008) for 48 countries over 1980-2004. The BEERs of Qatar, Kuwait and (to some extent) the UAE follow their real effective exchange rates. From 2000, with the increase in oil price, the BEERs appreciate while the real exchange rate of Oman and Saudi Arabia decline; therefore, the Saudi Arabian and Omani currencies get undervalued. Third, employing a new data set of Canadian commodity price indices, we revisit the Canada Bank Equation and introduce a new version with more fundamentals. We present a similar equation for Australia as one of the other developed commodity exporting countries. Using cointegration and the first differences analysis between real exchange rate and fundamentals, we investigate the SVECM and SVAR frameworks to decompose the variance of real exchange rate of Canada and Australia. In the SVECM analysis, the productivity differential and commodity price are the main contributor to the variance of the real exchange rates of Australia and Canada. For the SVAR analysis, we confirm that, as in the literature, demand shock is the dominant force in explaining the variance of real exchange rates of both countries. This result does not change even by adding the commodity price shock to the SVAR framework.

11 citations


Cites background from "Disorderly adjustments to the misal..."

  • ...Krugman (1978) applies equation 16 to the 1920s and the 1970s; he could not support the PPP in both periods....

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Journal ArticleDOI
SaangJoon Baak1
Abstract: This paper measures to what extent the real effective exchange rate of the Korean won is misaligned from its equilibrium value by estimating the equilibrium value using the behavioral equilibrium exchange rate (BEER) approach. The economic fundamentals such as the terms of trade, the relative price of non-traded to traded goods, net foreign assets and real interest rate differentials are employed to assess the equilibrium exchange rate. Considering the drastic changes in Korea's trade pattern, the trade partner weights, which are used to compute the real effective exchange rate, are not fixed, but variable. The estimation results using the quarterly data from 1982Q1 to 2009Q4 indicate that the actual exchange rate of the Korean won was substantially overvalued for the period from 2005Q1 to 2007Q4, and substantially undervalued for the period from 2008Q2 to 2009Q3. The actual exchange rate deviates from the BEER and from the long-run equilibrium (or sustainable value) of the BEER by 32% and by 24% respectively in 2008Q4.

7 citations


Cites background or methods from "Disorderly adjustments to the misal..."

  • ...Because the analysis of Kinkyo (2008) covers the period from 1981Q1 to 2000Q3, it is not unreasonable not to include China....

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  • ...Papers that do address this issue such as Chinn (1998), Goldfain and Baig (1998), and Kinkyo (2008) mostly focus on the 1997 financial crisis period, therefore, we cannot conclude whether and to what extent the won is under- or over-valued from the equilibrium rate assumed by economic fundamentals…...

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  • ...Following Clark and MacDonald (1998) and Kinkyo (2008), this explanatory variable is included to capture the Balassa-Samuelson effect....

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  • ...…and stability tests were all implemented using the computer software program, Jmulti. coefficient of LTOT can be either positive or negative as explained in the previous section, and the estimated coefficient value for LTOT turns out to be negative as was also found in the work of Kinkyo (2008)....

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  • ...Kinkyo (2008) used the fiscal balance divided by the GDP as a proxy for the Korean risk premium and reported a significant coefficient with the expected sign....

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Journal ArticleDOI
Abstract: This paper examines the size of real exchange rate (RER) misalignment in seven developing Asian counties and Japan An analytical framework is developed to estimate the equilibrium RERs, which are then used to derive the RER misalignments The estimation results from the model indicate that RERs have been misaligned in most of the Asian countries during the sample period, although not to the extent claimed in some studies The real exchange behaviour in these countries is mostly consistent with the economic fundamentals and the magnitude of measured RER misalignment is not alarming

4 citations


Cites methods from "Disorderly adjustments to the misal..."

  • ...In this study, the estimation of RER misalignment relies on the BEER approach (introduced by Clark and MacDonald 1998) to estimating the RER equilibrium, which is more suitable for developing or transition economies (Chudik and Mongardini 2007; Chen et al. 2008; Kinkyo 2008; Jongwanich 2009)....

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References
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Journal ArticleDOI
Abstract: 5_HIE purchasing-power parity doctrine has had its ebbs and flows I over the years. Interest in the doctrine arose whenever existing exchange rates were considered unrealistic and the search began for the elusive concept of equilibrium rates. It was first invokedalthough in somewhat ambiguous terms -in the period of the Napoleonic wars,' it received its christening at the hands of Gustav Cassel during World War I,2 and it was resurrected after World War II.3 It has also had its critics, among others Taussig after World War J4 and Haberler after World War IJ,5 but it has managed to survive nevertheless. In recent years, new efforts have been made to clothe the purchasing-power parity doctrine in the garments of respectability, and a proposal has also been put forward to use this doctrine as a guide in establishing equilibrium exchange rates.6 At the same time, new

3,108 citations



Posted Content
Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies

1,763 citations


Book
01 Jan 1994
Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models. Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies.

1,521 citations


Journal ArticleDOI
Abstract: We suggest a convenient version of the omnibus test for normality, using skewness and kurtosis based on Shenton and Bowman [Journal of the American Statistical Association (1977) Vol. 72, pp. 206–211], which controls well for size, for samples as low as 10 observations. A multivariate version is introduced. Size and power are investigated in comparison with four other tests for multivariate normality. The first power experiments consider the whole skewness–kurtosis plane; the second use a bivariate distribution which has normal marginals. It is concluded that the proposed test has the best size and power properties of the tests considered.

813 citations