Exchange Rate Effects on Korea's Economy

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Abstract
Korea has been under growing pressure to appreciate its exchange rate to reduce the trade surplus, particularly with the United States. A change in the external currency value of a country has direct effects on the trade via changes in relative prices and indriect effects via induced changes in income and monetary conditions. This notes presents some estimates of these effects, using the available price elasticity estimates and a macroeconomic model of Korea. Even though the estimates presented are not very precise, an exchange rate appreciation is shown to lower the trade balance, price levels, and overall economic growth of Korea. Then, this note suggests the policy course Korea should take to meet Korea's desire to reduce its external debt and to avoid the global consequences of the large continuing U. S. deficits. [430]