Real exchange rate dynamics and demographic structure in Korea

We employ a non-parametric approach to examine the real exchange rate and the entire age distribution in South Korea. We find that movements of the real exchange rate are tightly related to the evolution of the demographic structure and that the estimated age response function is consistent with a lifecycle model in which older generation and younger generation have a positive effect on the real exchange rate. Finally, the real exchange rate is forecasted to appreciate gradually, which suggests that the growing proportion of the older population has a stronger impact than the falling proportion of the younger generation on the real exchange rate.