The Effects of Globalization on Macroeconomic Dynamics in a Trade-Dependent Economy: The Case of Korea

41 Pages Posted: 28 Mar 2015

See all articles by Fabio Milani

Fabio Milani

University of California, Irvine - Department of Economics

Sung Ho Park

The Bank of Korea; Bank of Korea - Economic Research Institute

Date Written: May 27, 2014

Abstract

This paper studies the implications of globalization for the dynamics of macroeconomic variables over the business cycle for a small open trade-dependent economy, such as Korea.

We study the impact of globalization through the lens of a structural model. Globalization is modeled as a time-varying degree of openness in the economy. We estimate the model allowing for non-fully rational expectations, learning by economic agents, and incomplete international financial markets.

The empirical results show that globalization led to important changes in the macroeconomic environment. Domestic variables have become much more sensitive toward global measures over the 1991-2012 sample. In particular, domestic output and inflation are significantly affected by global output. Fluctuations in Korean output, inflation, and interest rates, which were driven for the most part by domestic shocks in the early 1990s, are due in large part (roughly 70%) to global shocks (and shocks inherent to an open-economy) by the end of the sample.

Keywords: Globalization, Inflation Dynamics, Global Slack Hypothesis, Openness, Inflation Expectations, Small Open Economy DSGE Model, Korea

JEL Classification: E31, E32, E50, E52, E58, F41, F62

Suggested Citation

Milani, Fabio and Park, Sung Ho, The Effects of Globalization on Macroeconomic Dynamics in a Trade-Dependent Economy: The Case of Korea (May 27, 2014). Bank of Korea WP 2014-13, Available at SSRN: https://ssrn.com/abstract=2580629 or http://dx.doi.org/10.2139/ssrn.2580629

Fabio Milani (Contact Author)

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Sung Ho Park

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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