The Key Determinants of Real Exchange Rates of Korean Won against US Dollar Before & After the East Asian Financial Crisis: 1991∼2011

In this study, I extend the studies of Meese and Rogoff(1988) and others to find the key determinants of the real exchange rate of Korean Won against US Dollar for the period of 1991∼2011 containing the East Asian financial crisis. Applying error correction model, I found that the real interest rate differential has no significant effect on the Won/Dollar real exchange rate either for the pre-crisis period or for the post-crisis. Korean foreign exchange reserve is estimated to have a negative significant effect on the real exchange rate for the post-crisis period. Korean credit ratings do not have any significant effect on the real exchange rate. These results imply that there still remain substantial limitation to financial market access and incomplete substitutability between home and foreign financial products in Korea despite the existence of real interest rate differential. In contrast, the rise and depletion of a country’s foreign reserve is visually observed and may have more direct impact on the real exchange rate.