There has been considerable controversy over how best to characterize South Korean exchange rate policy since the 1997-98 Asian crisis. Claims have run all the way from free floating to a pegged exchange rate. This paper resolves this controversy by making use of the concept of exchange market pressure (EMP). Specifically, it looks at how changes in international reserves compare with changes in exchange rates over the same period. This gives us a measure of how heavily the exchange rate is being managed through official intervention in the foreign exchange market. During the first decade since the Asian crisis, Korea accumulated a huge amount of reserves, and in general, intervention policy was asymmetrically focused on limiting appreciation more than limiting depreciation. Although Korean authorities claimed they were practicing a freely floating exchange rate regime, based on the evidence, Korea was actually practicing a “managed floating regime.” This tendency has remained during the post-subprime-crisis period based on the evidence of reserve accumulation and exchange rate trends. Rather than intervening just to smooth market fluctuations there has been a strong tendency on average to limit appreciations more than depreciations. This has been a way to support the “export-led” growth strategy, helping South Korea to maintain a positive current account position most of the post-Asian crisis period.
“Extrinsic and Intrinsic Motivations in Solving Collective Action Problems for Kye ( 계 ) ” (in preparation)