The economics of real exchange rate under financial repression with an application to Korea

Date
1995
Authors
Jang, Hong Bum
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Abstract
The objectives of this study are to analyze the effects of various government policies and external shocks on the movement of equilibrium real exchange rates under conditions of financial repression. Two main topics are addressed. First, the reaction of the equilibrium real exchange rate to trade and capital market liberalization policies, as well as to changes in government consumption, are examined under the condition of financial repression. This is undertaken in the framework of a general equilibrium intertemporal model. Second, an empirical application is provided using Korean data to test empirical implications of the theoretical model. The proposed model of the equilibrium real exchange rates is a variant of Edwards' (1991) model, extended to incorporate financial repression. Various comparative static analyses are undertaken and some important implications are derived. Under financial repression, the effects of government policies, including liberalization policies and expenditure changes, may result in real exchange rate changes that are contrary to the conventional wisdom. Deregulation of interest rates in the presence of other distortions may also generate a result contrary to the traditional wisdom. Empirical studies using Korean quarterly data over the past 24 years (1970 - 1993) support some implications derived in the comparative static analysis. The empirical model find that in Korea, since 1980, trade liberalization effect on the real exchange rate has been changed, from real depreciation to ambiguity. This implies that trade liberalization under financial repression may not result in a real depreciation, contrary to the conventional wisdom. The results of the theoretical work and the empirical estimation suggest a number of policy implications for Korea and other developing countries. First, a developing country under financial repression should anticipate the effect of each economic liberalization measure on the real exchange rate which may be different than that of previous studies. Based on an understanding of this anticipated effect, each developing country should attempt to find a countermeasure in order to avoid an unwanted misalignment of the real exchange rate. Especially, in Korea, it is necessary to analyze the anticipated effects in detail to cope with the accelerated financial liberalization scheduled in the near future.
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Thesis (Ph. D.)--University of Hawaii at Manoa, 1995.
Includes bibliographical references (leaves 179-187).
Microfiche.
xiii, 187 leaves, bound ill. 29 cm
Keywords
Foreign exchange rates -- Korea (South), Korea (South)
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Theses for the degree of Doctor of Philosophy (University of Hawaii at Manoa). Economics; no. 3210
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