This paper reviews exchange rate policy in Korea and
attempts to explain its unique aspects in relation to the
experience of Latin American countries. In Korea. sound fiscal
and financial policies accompanied by strict capital controls
provided the macroeconomic stability that prevented massive
movements in real exchange rates. Korea solved the conflicts
between competitiveness and the standard of living by focusing
on productivity growth as the key to maintaining export
competitiveness.

Estimating aggregate pass-through rates, we find that
Korean firms adjust profit margins to avoid large fluctuations in
the foreign currency price of exports so as maintain their market
shares abroad. Export prices in foreign currency terms will not
rise as much as won appreciation, and so profit margins will
decline with real appreciation. The political economy of exchange
rate policy is characterized by the importance of short-term
political popularity and the balance of political power among
interest groups.

The growing current account surplus stemming from the
favorable developments in the external conditions was
accompanies by the appreciation of the won and wage hikes.
Without the 'three lows', the exchange rate and wages would
have continues the trends of the early 1981s. During 1986-87,
however, the Korean economy diverged form the medium to
long-run trend. IN 1987, real GNP growth was over 12% per
annum with prices stabilized and the current account surplus
was 8% of the current GNP. This performance should not
continue in 1988, however, While the current account surplus
continues to grow and the real GNP growth reached over 12%,
price stability was threatened by the double-digit growth in
demand, ever-expanding surpluses, and wage hikes. Currency
appreciation, import liberalization and domestic demand expansion
became inevitable.

The won appreciation and wage increases are notable in
1988. In particular, the wage pressure that stems from the
ongoing socio-economic democratization process will have
enormous impacts on the domestic economy. The competitiveness
of exports will be weakened, unless productivity growth offsets
the weakening of export competitiveness. The profit margin of
export firms will decline, although export prices in terms of
foreign currencies increases. The trade and industrial structure,
however, can resume the trend of heavy industrialization. In this
situation, increased liberalization of imports, rather than rapid
real appreciation, should be chosen as the vest means for
reducing the large current account surplus.

Ⅰ. Introduction
Ⅱ. The Korean Experience with Exchange Rates
1. A Brief Review of the Exchange Rate System
2. Exchange Rate Movements
3. The Won`s Relationship to the Dollar and the Yen
4. Commercial Policies
Ⅲ. Determinants of the Won/Dollar Exchange Rate
Ⅳ. Macroeconomic Stability and Inflation
Ⅴ. Exchange Rates, Wages and Productivity
Ⅵ. Exchange Rates, prices and Profit Margins
1. Changes in Profit Margins
2. An Estimation of Pass-through Rates
Ⅶ. The Political Economy of Exchange Rate Policy
Ⅷ. Concluding Remarks