Fear of floating: Korea's exchange rate policy after the crisis

The purpose of this paper is to explore the question of whether a free Heat ing exchange rate regime is a viable option for Korea. This paper divides t he sample period into three subperiods: pre-crisis. crisis, and post crisis . We then analyze the causal relationships among both levels and volatility of three financial variables: exchange rates, interest rates, and stock pr ices. By using Granger causality tests and variance decomposition, our empi rical results show that causal relations among the three variables are weak during the post-crisis period, and furthermore, shocks in other financial markets do not have a significant contribution to explain the variations of each variable's forecast errors. Based on these empirical findings, we inf er that the Korean government, having adopted the de jure freely floating e xchange rate regime, is still fearful of floating for various reasons.