Korea’s real exchange rate has displayed a mild downward trend since the 1980s, with fluctuations of ±20 percent around that trend. This pattern is surprising because the classic Harrod-Balassa-Samuelson framework suggests that countries experiencing rapid growth in the productivity of their tradable industries should experience real currency appreciation over time. The paper decomposes the sources of change behind the Korean won’s real exchange rate into internal price drivers (the relative price of nontradable goods) and external price drivers (the international relative price of tradable…
