The role of the exchange rate in Korean economy

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.