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What Caused the Korean Currency Crisis in 1997? : Weak Fundamentals or Self-fulfilling Expectations

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The present paper investigates which factor is primarily responsible for the sharp depreciation of the Korean won against the US dollar in 1997, using a bivariate vector autoregressive model of real and nominal exchange rates. In the present study, we directly identify the relative importance of fundamental and non-fundamental factors from the raw data series on exchange rates. This approach is different from most previous studies on the Korean currency crisis, which use proxy variables to represent the two factors. The empirical results show that the collapse of the Korean currency in 1997 appears to be mostly a result of the weakened macroeconomic fundamentals of the economy with, to a limited extent, some non-fundamental factors.
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Keywords: F31; F41; O11; currency crisis; exchange rates; fundamentals

Document Type: Research Article

Affiliations: 1: Department of Economics, School of Economics and Trade, Kyungpook National University, Daegu, 702-201, South Korea 2: Department of Finance, Univer-sity of Houston, Houston, TX, 77204-6021, USA 3: Department of Economics, Pusan National University, Pusan, 609-735, South Korea

Publication date: June 1, 2007

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