Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society

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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

Comparison of the Disequilibrium Error Dynamics for the Won-Dollar Foreign Exchange Rate Before and After Financial Crisis

Vol.19, No.4, December , 37–60

English Version |  Korean Version
  •   (The Bank of Korea)


The paper analyzes whether there was any change in the dynamics of disequilibrium error of Korean Won-Dollar foreign exchange rates before and after Asian financial crisis. We used a transformed error correction model where the dependent variable is the disequilibrium error deduced from the cointegration theory, following Kim and Park (2008). The long run equilibrium of exchange rate is basically defined from the monetary approach. From the estimation using the data for the period before the Asian financial crisis, we found there was the negative effect of exchange rate disequilibrium shock on the real growth rate, even though the disequilibrium error has been quickly disappeared probably through the government intervention. After the crisis, the disequilibrium error of exchange rate did not disappear quickly possibly due to the choice of free floating system. However the detrimental effect of disequilibrium shock for the real growth rate has been mitigated. The result confirms a policy dilemma that is a trade-off between the exchange rate stabilization and sound growth in the real sector which may not be attained simultaneously.

   Won-Dollar foreign exchange rate, Long run equilibrium, Cointegration, Monetary approach, Disequilibrium error

JEL classification codes
   C3, F4

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