The Determinants of South Korea's Trade Balance: A Cointegrating Regression Approach

This paper examines the key determinants of South Korea's trade balance using three fully efficient cointegrating regression methods. We. find that the trade balance, foreign income, money supply, real effective exchange rate, and domestic income are cointegrated. Consistent with the Marshall-Lerner condition, appreciation in the real effective exchange rate is negatively related to the trade balance. Our results have important implications for using exchange rate policy as a device to achieve trade balance.