Does Trade Elasticity Vary Across Regimes? New Evidence from Korean Exports, Incorporating Regime Changes*

Abstract

We examined whether the elasticities of Korean exports with respect to global GDP and to the exchange rate vary depending on exports’ expansionary or contractionary regimes. Our empirical analysis incorporated regime changes and cointegration into a multivariable smooth transition autoregressive vector error correction model. Our estimation results revealed asymmetries in the short-run elasticities of Korea's exports between the two regimes, although their long-run elasticities remain stable. The positive effect of global GDP on Korea's exports is inelastic during contractionary regimes but elastic in expansionary regimes. The effect of home currency appreciation is negative and elastic under expansionary regimes but positive and inelastic under contractionary regimes.