| This study examines the effects of devaluation in Korea using both the traditional elasticities-absorption approach and the monetary approach. A trade balance equation and a balance of payments equation are constructed and estimated to determine whether or not devaluation brings about long-run positive effects on the trade balance and the overall balance for Korea from 1955 to 1980. In addition, a simultaneous equation elasticities model, which is more general than the partial equilibrium elasticities model, is introduced to evaluate the effects of devaluation on the price level, exports, imports and wages.;The results of a direct test and a residuals test on the trade balance equation show that devaluation has long-run positive effects on the trade balance, consistent with the elasticities approach. The tests show initial positive effects, then negative effects, with the cumulative long-run response remaining positive. As for the overall balance, the evidence is also consistent with the monetarist proposition--positive effects of devaluation on the overall balance are evident both in the short- and long-run, without any offsetting negative effects.;The results of simulation based on the simultaneous equation elasticities model support the general conclusion of the single equation tests. The simulation shows that devaluation improves the trade balance during the first three-year period, followed by negative effects during the fourth and the fifth years. However, the long-run effects during the five-year period remain positive. The results also show that devaluation causes short-run inflationary pressure on the domestic price level. This study finally discusses alternative exchange rate policies regarding the recent balance of payments situation in Korea. |
