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The Effects of Exchange-Rate Volatility on Korean Trade Flows: Industry-Level Estimates

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  • Valuable comments of three anonymous referees are greatly appreciated. Remaining errors, however, are ours.

Abstract

As one of the world's most important exporters, Korea might find volatility in the won to be detrimental to trade. But, since previous studies – as well as economic theory – suggest that the impact of exchange-rate risk on individual countries trade flows can be ambiguous, each case must be tested empirically. This study does, examining 148 Korean export industries and 144 import industries vis-à-vis the rest of the world. We find that in the long run, twenty export industries respond negatively to exchange-rate risk, while twelve respond positively. For imports, however, eight have negative coefficients and fourteen have positive ones. The majority of industries are unaffected. Small Korean exporters are particularly vulnerable to exchange-rate risk, as are two large export industries. Imports in the Machinery and transport equipment sector, particularly automobiles, are most likely to see a decrease in the overall trade balance due to increased risk.

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