Authors: Chee-Hong Law
Addresses: School of Social Sciences, Universiti Sains Malaysia, 11800 Penang, Malaysia
Abstract: This paper investigates the impact of foreign exchange reserves on the value of the Korean won relative to the US dollar using a comparison of linear and nonlinear autoregressive distributed lag estimation. This paper, to the best of the author's knowledge, is the first paper examining the nonlinear dynamics between the Korean foreign exchange reserves and the exchange rate. In the linear model, the foreign exchange reserves do not have a significant impact. In contrast, the nonlinear models reveal that only the reduction in the reserves will cause the Korean won to appreciate in the long run. In the short run, increases and decreases in the foreign exchange reserves are significant. There is also evidence supporting the hypothesis of sign bias in long-run and short-run relationships. Additionally, the asymmetric patterns are found for long-run and short-run effects, indicating the importance of measuring the nonlinear effects.
Keywords: Korea; exchange rate; foreign exchange reserves; nonlinear autoregressive distributed lag.
International Journal of Economics and Business Research, 2019 Vol.18 No.1, pp.73 - 93
Received: 14 Jun 2018
Accepted: 07 Aug 2018
Published online: 06 Jul 2019 *