earticle

영어

Since the 1980s, international trade has invigorated the Korean economy. With the increase in countries that have joined the FTA(Free Trade Agreement), Korea’s trade volume has been growing. Due to the agreement with the IMF in the foreign exchange crisis in 1997, Korea has freely opened up to capital transactions by opening markets and welcoming the inflow of the foreign currency. Capital decontrol and liberalization of foreign currency can cause the sheer volatility of exchange rates. Because Korea has been more focused on trade than domestic demand, these exchange fluctuations have had significant effect on Korea’s economy indicators. To avoid negative effect of the drastic change in exchange rate, most countries try to stop the sheer volatility of exchange rate and keep the exchange rate stable by adapting their national policy. This paper analyzes the nature of exchange rate volatility and the factors that determine exchange rate. First, testing the validity of purchasing power parity on the US Dollar, Japanese Yen and Euro against the Korean Won was investigated by OLS(Ordinary Least Squares) analysis using monthly CPI and annual GDP deflator. In terms of empirical study, the theory of purchasing power parity holds true on the US Dollar and Japanese Yen against the Korean Won while there is no empirical findings for the existence of the purchasing power parity on the Euro against the Korean Won. Secondly, the expanded model of exchange rate determination was tested to reveal how interest rate and money supply affect exchange rate. This paper shows that the factor to determine exchange rate is not determined by a single item such as price level, interest rate or money supply. We can see that each factor has a different effect on the exchange rate.