Short-Term External Debt and Foreign Exchange Rate Volatility in Emerging Economies: Evidence from the Korea Market

Abstract:

We empirically analyze the main determinants of foreign exchange rate (FX) volatility in emerging market economies using the data of Korea corporations and financial institutions. We find that short-term external debt is more important than trading volume of foreign investors in explaining FX volatility. Our results suggest that short-term debt-controlling measures, such as a tax levy on short-term borrowing, can be more effective in moderating FX volatility than can the measures affecting the trading volume, such as a Tobin tax.

Key Words::

• exchange rate volatility
• short-term external debt
• trading volume

Additional information

Notes on contributors

Taeyoon Sung

Taeyoon Sung ([email protected]), corresponding author, is a professor of economics at the School of Economics, Yonsei University, Seoul, South Korea. Danbee Park ([email protected]; [email protected]) is a Ph.D. candidate in economics at the School of Economics at Yonsei University, Seoul, South Korea, and a visiting research scholar at Chazen Institute of International Business, Columbia Business School, Columbia University, New York, New York. Ki Young Park ([email protected]) is an associate professor of economics at the School of Economics at Yonsei University, Seoul, South Korea. This paper has been developed from a research project financially supported by the Korea Institute of Finance, “An Analysis on Determinants of the Increase in Won/Dollar Exchange Rate Volatility” (in Korean), KIF working paper no. 11-03.

Danbee Park

Taeyoon Sung ([email protected]), corresponding author, is a professor of economics at the School of Economics, Yonsei University, Seoul, South Korea. Danbee Park ([email protected]; [email protected]) is a Ph.D. candidate in economics at the School of Economics at Yonsei University, Seoul, South Korea, and a visiting research scholar at Chazen Institute of International Business, Columbia Business School, Columbia University, New York, New York. Ki Young Park ([email protected]) is an associate professor of economics at the School of Economics at Yonsei University, Seoul, South Korea. This paper has been developed from a research project financially supported by the Korea Institute of Finance, “An Analysis on Determinants of the Increase in Won/Dollar Exchange Rate Volatility” (in Korean), KIF working paper no. 11-03.

Ki Young Park

Taeyoon Sung ([email protected]), corresponding author, is a professor of economics at the School of Economics, Yonsei University, Seoul, South Korea. Danbee Park ([email protected]; [email protected]) is a Ph.D. candidate in economics at the School of Economics at Yonsei University, Seoul, South Korea, and a visiting research scholar at Chazen Institute of International Business, Columbia Business School, Columbia University, New York, New York. Ki Young Park ([email protected]) is an associate professor of economics at the School of Economics at Yonsei University, Seoul, South Korea. This paper has been developed from a research project financially supported by the Korea Institute of Finance, “An Analysis on Determinants of the Increase in Won/Dollar Exchange Rate Volatility” (in Korean), KIF working paper no. 11-03.