Exchange rates and foreign trade in Korea
Balassa, Bela
Korea's exports have made an important contribution to its outstanding economic growth. Its exports, in turn, have been affected by domestic economic variables, including exchange rate policy, and by external influences. Among domestic economic variables, the exchange rate appears to have had a greater influence on exports than changes in export prices or changes in the prices of competing domestic goods. Taking into account that Korean exports are influenced by external factors, such as foreign export prices and foreign incomes, does not affect this conclusion. Korean imports are affected by domestic income, the exchange rate, import prices, and the prices of competing domestic goods. Again, the influence of the exchange rate is greater than that of import prices and the price of domestic goods. The results indicate that Korea can usefully employ the exchange rate as a policy variable. This has been the case during much of the 1965-88 period that the author considers, except for 1975-80, when it led to a substantial overvaluation of the currency. Korea should also use the exchange rate in the future as long as domestic and foreign inflation rates differ.
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