The effects of the yen/dollar exchange rate on the Korean economy

The effects of changes in the yen/dollar exchange rate on the Korean economy during the pre-crisis and the post-crisis periods are examined using VAR models. The results show that Korean industrial production does not respond significantly to the depreciation of the Japanese yen against the US dollar during the pre-crisis period, but that it declines substantially and significantly during the post-crisis period. The forecast error variance decomposition also confirms that the impact of yen/dollar exchange rate shocks in explaining Korean industrial production is negligible during the pre-crisis period, but substantial in the post-crisis period. These empirical results are interesting in that the free-floating exchange rate regime adopted in the post-crisis period may be inadequate to insulate the Korean economy from external shocks such as fluctuations in the yen/dollar exchange rate. Copyright (c) 2005 John Wiley & Sons, Ltd.