Asian Financial Crisis and Korean Trade Dynamics

Since the Asian financial crisis in 1997, Korean international trade has gone up substantially in both volume and trade balances. The improvement is largely due to an expansion of international markets through various bilateral trade agreements and the structural changes in Korean exchange rates. This paper investigates the exchange rate – trade balance dynamics, popularly known as the J-curve phenomenon. Employing the Bounds-Testing approach to cointegration and error-correction modeling on Korean bilateral trade for the pre- and post- Asian crisis periods, the study finds that support for the strict version of the J-curves has been fading after the crisis. The weaker version of J-curve is generally supported in both pre- and post-crisis sample periods. There exists a long-run relationship among the Korean exchange rates, domestic income, foreign income, and Korean trading balances.