As of recent, the United States has been making an issue of currency manipulation against its trading partners, especially in the case of Japan, China, and Korea with which the current account deficit of the United States has been increasing. This issue was also raised in the TPP Joint Declaration last year, TPP countries agreed to refrain from competitive devaluation. Despite the accusations on currency intervention against appreciation for competitive purposes, the causal link between the exchange rate and exports is not evident. Why exchange rates are apparently disconnected from real variables, including exports, has been one of the puzzles in international economics (exchange rate disconnect puzzle).
In our research, using Koreas export data and the panel data from fifteen annual observations of ten destination countries during the period of 2000-2014, we find that real exchange rate movements are less relevant to exports both in the short run and long run. We analyze the link between the Won/dollar, Yen/dollar, and Yuan/dollar exchange rates and Koreas exports, with the destination countries fixed effects controlled. We find that, in real terms, the depreciation of the Korean Won does not boost Korean exports significantly in both the static model and dynamic error correction model. Furthermore, contrary to conventional wisdom, a one percent depreciation of the Japanese Yen increases Koreas exports by 0.771%. Thus, currency intervention may not necessarily lead to export increase in one country and a current account deficit in the other. This implies that policy makers have lower incentive to change exchange rates with the purpose of improving trade imbalance.