The role of the exchange rate in Korean economy: A shock absorber or a source of shock
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This paper analyzes the role of the exchange rate in Korean economic fluctuations based on a structural vector autoregression model. We employ sign restrictions to identify structural shocks of the VAR model, and examine whether the exchange rate works as a shock absorber or a source of shocks in Korea. We find that nominal shocks play a major role in explaining the real exchange rate fluctuations, especially after the currency crisis. This implies that the exchange rate seems to be a source of destabilization rather than a shock absorber in Korea.
Abstract
This paper analyzes the role of the exchange rate in Korean economic fluctuations based on a structural vector autoregression model. We employ sign restrictions to identify structural shocks of the VAR model, and examine whether the exchange rate works as a shock absorber or a source of shocks in Korea. We find that nominal shocks play a major role in explaining the real exchange rate fluctuations, especially after the currency crisis. This implies that the exchange rate seems to be a source of destabilization rather than a shock absorber in Korea.
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