Asymmetric exchange rates and unofficial exchange rate interventions: The case of South Korea

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Abstract

Applying Milton Friedman's 'plucking' model of output fluctuations, we investigate the behavior of the Korean won/dollar exchange rate using a state-space model with Markov switching, which incorporates both symmetric and asymmetric shocks. We find that the Korean won/US dollar exchange rate rarely falls below its trend, but is plucked upward from time to time by transitory shocks. This asymmetry suggests that the monetary authority unofficially intervenes in the foreign exchange market to support its own target level from below. Further evidence from changes in reserve assets indirectly supports our finding.

Original languageEnglish
Pages (from-to)359-371
Number of pages13
JournalInternational Economic Journal
Volume25
Issue number3
DOIs
Publication statusPublished - 2011 Sep 1

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

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