Korean Current Account Surplus and the Transmission of the Won-Dollar Exchange Rate

Abstract

This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.

Keywords: current accout, exchange rate, trade balance