Korean economy is now in the wave of drastic adjustment of industrial structure under IMF's surveillance in order to tie over the present economic and financial crisis.  on December 5, 1997, government signed the IMF's memorandum of understanding concerned with international rescue package of worth 55 billion.  Even though the foreign money for the bail-out is coming from IMF, IBRD, ADB and has rolled over the 24 billion dollars of short-term debt, our currency is still depreciating sharply against the U. S. dollar and stock market prices are in turmoil everyday.    Moreover, our interest rates rised by more than level of 20%.  The volatility of these financial prices, of course, is basically due to the meager usable foreign exchange reserves, huge amounts of short-term debt denominated in the U. S. dollar, frangible and vulnerable financial sector, and widespread capital outflow due to the uncertainty of Korean economic prospects.

Facing these kinds of economic circumstance, to implement prediction for the Korean economy of this year itself is not easy job because the economic structure will be fundamentally changing within one year.

The purpose of this study is to perform the Korean economic outlook for 1998 which is focused on the exchange rate and capital mobility together with interest rates, price level, and real growth rate of GDP.

To meet this end, we first built the dynamic exchange rate model considered Korean economic structure.  The model is partitioned into the money market, output market including mark-up pricing model, and foreign exchange market.  And then, we derived the simultaneous differential equations which consist of rates of change in exchange rate and price by using the solutions to the non-dynamic endogenous variables.  The dynamic model turned out to have a saddlepoint stability since the model has two real characteristic roots which are one stable and another unstable.

This approach is basically similar to the model of Dixit(1980), Buiter and Miller(1982), Smith(1987), and Pikoulakis(1989) which are focused on the analysis of overshooting phenomenon of real exchange rate by once-for-all unanticipated increase in money supply.

once we estimated the parameters of structural behavioral equations by ordinary least square method or two-stage least square method, and then using these estimators, prediction was implemented.  The programs used here are the Austin and Buiter's one, and solution program for dynamic rational expectation model which is Liverpool model of England.

According to the results of prediction, the exchange rate and interest rate at the end of the year of 1998 are expected to be 1,329∼1,370 won per dollar and 17.4∼18.4%, respectively.  on the other hand, the continuous rising in price level is predicted so that the average rate of change in price over the previous year will reach 8.4∼15.7%.  Real GDP growth is expected to be 0.93∼1.66% over 1997.  Finally, capital account surplus of 7.8 billion dollars in 1998 is estimated, which is higher level than annual average surplus of 7.6 billion dollars during the period of 1990∼95.