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Cambridge Journal of Economics Advance Access originally published online on October 12, 2007
Cambridge Journal of Economics 2008 32(1):111-124; doi:10.1093/cje/bem023
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© The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Disorderly adjustments to the misalignments in the Korean won

Takuji Kinkyo*

* Ministry of Finance, Japan, 3-1-1 Kasumigaseki, Chiyodaku, Tokyo 100-8940. Email: takuji.kinkyou{at}mof.go.jp. The views expressed here are those of the author and do not necessarily reflect the position of the Ministry

Address for Correspondence: 31-9, 1-chome, Minami-cho, Kichijoji, Musahino-shi, Tokyo 180-0003, Japan

This 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.

Key Words: Equilibrium real exchange rate • Exchange rate misalignments

JEL classifications: F31, F41

Manuscript received June 13, 2006; final version received January 26, 2007.


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