Lead-lag relationship between macroeconomic variables: evidence from Korea

This study seeks evidence supporting the existence of theoretical relationships and possible directions of causality between call money rates, exchange rates, industrial production index (IPI) and stock market movements from the perspective of Korea. We apply standard time series techniques including long run structural modelling (LRSM), vector error correction modelling (VECM) and variance decomposition (VDC). Our findings tend to suggest that IPI is the most leading factor among our variables for the long-term, and exchange rates is the most follower. It can be explained since the real economy is expected to lead monetary policy, stock markets and exchange rates in the long run. Findings of this study are meaningful for the investors and policy makers since a very few studies have been carried out examining the causal relationships of the above variables with the above techniques in Korea. This paper may help fill the gap for policy makers, practitioners and investors.