An analysis of the structural change in the exchange market pressure: Korea, 1980-89

Abstract

This paper tests the stability of the exchange market pressure model in the case of Korea under a managed floating exchange rate. Using the cusum of squares test, we show that the structural stability was broken in about mid-1986. This is plausible given that there was a sudden surplus in the balance of payments in Korea in late 1985. Estimation results show that the exchange market pressure model works very well where there is a surplus in balance of payments; however, its explanatory power is poor in periods of deficit.