In the 2000s, there have been noticeable changes in world economy, international financial market and international specialization system. The importance of the US is declining in world economy and trade. The reorganization of international monetary system has been discussed based on the US dollar decline phase, increasing importance of other countries except the US in international financial transactions and trade, and limits of currency system focused on US dollar. These changes insist that analyzing impacts of US dollar exchange rate only on the trade be insufficient. Also, with the progress in the international specialization, interrelations among countries are emphasized. Therefore, the necessity of new analyzation on the relationship between exchange rate volatility and Korea’s trade.
This study discusses evaluation of influence of the exchange rate of Korean won to yuan, yen and euro on competitiveness in exports of Korea and policy implications. The main works and results of this study are as follows. Chapter II describes changes in economic and political environment that make Korea’s current exchange rate policy based on dollar insufficient. Chapter III analyzes the impact of exchange rate on Korea’s trade and trade balance by each major currency and industry. Chapter IV provides the transition of exchange rate system of Korea and indicates that exchange rate determined by the current system has fundamental limits to recover the balance of foreign transactions. In chapter Ⅴ, we suggests summary of the findings and some policy implications.
To be specific, US dollar decline phase due to global imbalances happened. The importance of the US is overwhelmed by China in the trade environment of Korea and various currencies except US dollar, such as yuan, euro and yen are emerging as settlement currencies. The necessity of analyzing international trade conditions based on Global Value Chain is increasing. Therefore, it is required that evaluation of influence of the exchange rate of Korean won to various currencies on competitiveness in exports of Korea.
In Chapter III, we analyze the influence of exchange rates of major currencies on total, industrial and regional trade balance of Korea. For exchange rate data, won-euro, won-yuan and won-yen exchange rate as well as won-dollar exchange rate are used and we analyze the impacts of each exchange rate on balance of trade. VAR model is employed and the results can be summarized as below. First, won-dollar, won-yuan, and won-yen exchange rate has greate influence and won-euro exchange rate is following them. In the previous studies won-dollar exchange rate was suggested as the most important factor, however recently won-yen and won-yuan exchange rate are considered as important as won-dollar exchange rate . Second, the one standard deviation shocks of won-yen and won-dollar exchange rate on trade balance of Korea are found to be similar. Since 2013, the range or revaluation of won-yen exchange rate has been larger than that of won-dollar exchange rate and the revaluation of won-yen exchange rate exerts negative influence on trade balance of Korea. Lastly, according to variance decomposition, not only the Won/Dollar but also Yen/Dollar exchange rates have significant impact on the Korean economy.
In Chapter IV, since the Won-Dollar exchange rate is the most stable, it makes sense that the current exchange rate system is reasonable. According to cross-correlation between each exchange rate and current account balance (trade balance), the change in each exchange rate has limits to recover the balance of foreign transactions. Also, a comovement-analyzation using DCC-GARCH, Korea Won-Dollar exchange rate is affected more by volatility of Dollar’s value in the international financial market than trade balance (or, current account balance) of Korea. This implies that rebalancing ability of the current exchange rate system is insufficient. We suggest improvement plans for above mentioned problems as globalization of Korean Won, regional monetary cooperation and diversifying the vehicle currencies.
In Chapter V, we suggest improvement directions considering the above results. First, won should be globalized. Globalization of won helps to determine exchange rate more favorable to market. Also, supply and demand of won besides that of foreign currencies can affect exchange rate and it helps to improve the political influence on stabilization of exchange rate. Second, financial infrastructure, such as cross-currency market, regional monetary system, is needed to respond the increasing importance of major currencies. Third, systemic approach for effective management of current account is required. Policy means, such as improvement of overseas investment, cooperation with the central bank, regional monetary cooperation, can be recommended and building up a system for effective utilization of them.