Behavioral economic view: The episode of Won/USDollar exchange rate during the crisis

Abstract

Background/Objectives: This paper is motivated by recent evidence that the relation between Korean Won-US Dollar exchange rate and US federal funds rate is time-varying unlike conventional belief on the relation. Methods/Statistical Analysis: We employ the rolling window approach to figure out the influence of the crisis on the relation between the Won/ US-Dollar exchange rate and the US interest rate. The rolling window approach is used in time series analysis especially when the available sample period is short. This approach can be applied in order to check the predictive performance using a finite number of windows within a considered time span. Findings: The evidences resulting from the rolling window approach show that the Won/US-Dollar exchange rate and the US interest rate appear to be negatively correlated in some periods and positively correlated in others. Those time-varying patterns in the relation between exchange rate and interest rate are difficult to be explained from the traditional view of uncovered interest parity. On the other hand, behavioral macroeconomic perspectives provide various explanations for theoretically unconventional finding in the context of rational expectation formation. Application/Improvements: Our empirical observation remains with the conjecture that investors' fear near the crisis may lead to some anomaly. The latter hypothesis should be further studied by the behavioral macroeconomic view.