Appropriate Exchange Rate Regime in Developing Countries: The Case of Korea

This paper examines the viability or appropriateness of two polar solutions, especially free-floating regime for developing countries. To do so, we investigate the Korean financial markets, which provide interesting case, utilizing multivariate GARCH and various VSR (Vector Auto-Regression) tools. We find that the slightest sign of either weakness of domestic economy or fragility of international financial markets might cause foreign investors to flock out of Korean financial markets and result in inviting another turmoil in Korea. In a limited sense, it is fair to say that the current transitory period from managed to flexible exchange rate regime is a very vulnerable period for Korean economy, and we need to be well equipped to another near international financial turmoil.