The exchange rate is one of the most important macro-economic issues in the Korean economy. South Korea had suffered from an extremely severe currency crisis in 1997. During this period, national wealth plummeted by 20~30%. Furthermore, the Korean economy nearly escaped encountering a second currency crisis due to the global financial crisis in the wake of the Lehman Brothers Bankruptcy in 2008. Korea’s foreign exchange (FX) market had been struggling to change its structure after Korea’s 1997 Currency Crisis. Opening financial markets and liberalization of capital movements progressed rapidly by adopting the floating exchange rate system. Increase in the volatility of the exchange rate increased, and keeping the exchange rate stable has become a top policy priority.
This study comprises of three key aspects. First is a relationship analysis between the characteristics of the Korean FX market and the exchange rate. The Korean FX market has been transformed by continuous liberalization from 1997 to the present, necessitating an analysis on how this change is related to the exchange rate. The second is the analysis of the effect on the exchange rate fluctuation caused by characteristics of supply and demand on foreign exchange. The exchange rate is determined by supply and demand because the currency of emerging economies such as Korean Won does not have international convertibility. Consequently, in case there is a threat to or no guarantees for the stable supply of foreign exchange, the exchange rate could be overshot, and the phenomena can become the seed of tragedy (currency crisis). Existing exchange rate theories have difficulties in reflecting the characteristics of exchange rate fluctuation in emerging economies. Thus, we should try to find policy responses appropriate for the current Korean market, based on accurate analysis and understanding. The third aspect involves the analysis on the determinants of foreign exchange rate. Policy directions are influenced by real and financial factors; and supply and demand factors simultaneously. Without accurate evaluation of these factors, policy effectiveness can become diminished. So it would be necessary to analyze them with respect to its factors to obtain basic references for policy.
Exchange rate fluctuation is becoming more frequent and increasing in duration in South Korea. It is because, after opening its capital market, capital movements became a dominant factor in determining exchange rates. The Korean economy is a small and open economy, and again, its domestic currency lacks international convertibility. Supply and demand of foreign currency, therefore, exercises unilateral influence in determining the Korean Won’s exchange rate. That is, foreign exchange has asymmetric power in relation to the Korean Won as a determinant of exchange rate. For this reason, the following should be noted when making exchange rate policy in South Korea.
First, it would be desirable to prepare for the eventuality that rapid fluctuation and instability of exchange rates might become routine. After opening its capital market, fluctuations in the Korean FX market tends to be caused more by capital market factors rather than economic fundamentals; as a result, being more easily exposed to frequent change and instability. This situation warrants an immediate solution. Second, it is required that portfolio investment and other capital account balance be managed simultaneously: both influence substantially the supply and demand of foreign exchange in South Korea. However, both of these balances are investment balances for the short-term, which means they are vulnerable to high volatility for the short term. It is important to find the way either to lower the proportion of these balances or to spread them out over a longer period of time. Third, if the exchange rate imbalance is unavoidable, the Korean Won exchange rate should be depreciated rather than be appreciated to facilitate its management, because it would be possible to control the rates using the domestic currency when depreciated.
According to the results from modeling related to the balance of payments, it is shown that the supply and demand of foreign exchange is determined by the balance of capital accounts in the short run, and by the current account balance in the long run. As capital investments consist mostly of short-term investments, it is impossible to completely overcome instability at a certain level, in determining the balance of capital accounts. In a longer period of time, however, when the balance of current account is a surplus, the capital inflows expecting exchange gain also increase and its amount become even greater with a bigger surplus; and it implies that economic fundamental still has an important role as well. The following are policy suggestions drawn from these characteristics of supply and demand of foreign exchange.
First of all, managing the balance of current account is a prerequisite for the stability of exchange rates. It would be especially desirable to maintain the balance of current account at a certain level of surplus; which helps to keep the supply of foreign exchange stable. During a crisis, the balance of current account tends to determine the direction of all balances comprising the balance of capital account. It is important, consequently, to maintain surplus on a consistent basis, even if the amount is small. Second, a buffer is needed to control volatility in the short term. Although fluctuation of the balance of capital account can be caused by domestic factors, it is not unusual that foreign factors such as the global financial crisis of 2008 to cause more serious fluctuations in certain instances. In this situation, retaining foreign reserves would be the first policy choice. Third, measures to prepare for the uncertainty of oil prices and price of raw materials in the supply side is also needed. Analysis of the accounts balance reveals that oil price is the most influential factor in determining the exchange rate of the Korean Won, followed by price of raw materials. Oil price is the most crucial factor determining the capital account balance as well, but happens to be a variable that Korea has no control over. The Korean economy is also highly dependent on foreign raw materials. For this reason, responses to the volatility derived from the shock of oil and raw materials prices must be formulated beforehand. Fourth, to manage the economic fundamental is the most important factor in the end. Composite Leading Indicators (CLIs), prospect of domestic economic growth rate, seem to be very important when it comes to early warning of the fluctuation in the balance of payments. CLIs are considered the most important index in capital movements as well. Strong economic fundamentals are likely to ensure high CLIs and maintain the balance of current account in a surplus. One of the indices determined directly by the fundamentals is direct investment. Hence, managing fundamentals could be the most critical solution for maintaining surplus and stability in the balance of payments.
‘Real demand’ is the primary macro-economic factor identified by the analysis of determinants in the fluctuation rates of the Korean Won. The demand related to exports is representative of demand in the Korean economy. Maintaining export demand requires possessing export competitiveness. On the other hand, the demand related to domestic consumption becomes more stable due to the increase of income level; albeit being limited in scale compared to other developed countries. Moreover, the demand-related government consumption is also limited, by budget constraints. Stabilization of demand related to investment can be achieved by preemptive macro-economic policy since it can be affected by economic forecasts. Yet even in this case, as investment is decided by the private sector, it can be only achieved by improving economic fundamentals.
Since Korea’s 1997 currency crisis, supply and nominal factors are becoming more likely to impact the exchange rate. In case of the supply factor, it seems to be caused by shocks from policy changes, bottleneck effect of raw materials, and technological progress in industries such as IT. In the future, it can be implied that stability of exchange rate requires constant technological improvement and appropriate supply of resources. In case of the nominal factor, it seems to be caused by policy changes and globalization of financial markets. Capital flows and volatility of exchange rate would be caused by changes in financial and monetary division, expectations of investors, or policy directions. It is, generally, difficult to control international capital movements and its fluctuation of exchange rate caused by economic shocks. Finally, although supply and nominal factors are necessary to the stability of exchange rates in the short run, the economic fundamentals would primarily influence the stability of exchange rates in the long run.

서 언 

국문요약 
 
제1장 서 론 

제2장 우리나라 외환시장의 특징분석 
1. 글로벌 금융위기 이후 외환시장 동향 
2. 국제수지 변동과 외환수급 
3. 실제환율과 균형실질환율 간의 격차 

제3장 국제수지 항목별 변동요인 분석 
1. 국제수지 항목 외환수급의 결정요인과 특징 
가. 국제수지와 환율 
나. 신경망모형을 이용한 추정체계 
다. 신경망(Neural Network)의 원리 
2. 추정결과 
가. 경상수지 세부항목 
나. 자본수지 세부항목 
다. 국제수지 결정요인 추정의 시사점 
3. 국제수지 항목간 연계관계 
가. 경상수지와 자본수지 간의 관계 
나. 경상수지와 차입의 관계 
다. 경상수지와 포트폴리오수지의 관계 
라. 경상수지와 직접투자의 관계 
마. 주요 국제수지 항목간의 관계 
4. 외환수급의 종합적인 특징과 시사점 

제4장 환율변동의 거시경제적 결정요인 분석 
1. 서론 
2. 기존 문헌
3. 실증분석모형 
가. 장기 무영향 제약을 이용한 구조 VAR 모형 
나. 실증분석모형 
다. 자료 
4. 분석결과
가. 충격반응함수 
나. 예측오차 분산분해 
다. 역사적 분해 
5. 월별자료 분석결과 
가. 원/달러 환율의 월별자료 분석 
나. 원/엔 환율의 월별자료 분석 
6. 주요 결과와 시사점 

제5장 정책적 시사점 
1. 우리나라 외환시장 특징에서 모색한 시사점 
2. 외환수급의 특징에서 모색한 정책적 시사점 
3. 환율변동의 거시경제적 요인분석의 정책적 시사점

참고문헌 

Executive Summary