Are Currencies Coordinating?: The Coupling-Decoupling Behavior of Won-Dollar and Yen-Dollar Exchange Rates

This paper studies dynamic relation, namely, two currencies of Korean won and Japanese yen, before and after the East Asian financial crisis of the late 1990s. We conjecture that there exists a longrun relation between won and yen, which is characterized by a bandreverting- type dynamic behavior. This band-reverting behavior of the two currencies implies that their relative values maintain a stable relation, keeping their discrepancy within a certain bound or band. Such band-reverting behavior is due to the arbitrage-seeking behavior of investors or the market intervention of monetary authorities. Our empirical analysis shows that the two currencies have a long-run equilibrium relation that implies a band-reverting-type dynamic relation. Our analysis also shows that this band-reverting relation becomes clearer in the post-crisis period.