Uncertainty Shocks and Asymmetric Dynamics in Korea: A Nonlinear Approach

45 Pages Posted: 26 Apr 2018

See all articles by Kevin Larcher

Kevin Larcher

Oklahoma State University - Stillwater - Department of Economics & Legal Studies in Business

Jaebeom Kim

Oklahoma State University - Stillwater

Youngju Kim

Economic Research Institute, The Bank of Korea

Date Written: April 26, 2018

Abstract

This study investigates the impact of uncertainty shocks on macroeconomic activity in Korea. For this purpose, a Smooth Transition VAR model is employed to document the state-dependent dynamics of two distinct types of uncertainty shocks, namely, financial market based and news-based. When nonlinearity is allowed to play a role in our model, quantitatively very different asymmetric dynamics are observed. Following in inflation targeting, the responses tend to be smoother and less pronounced. Our empirical results support the view that the link between uncertainty and macroeconomic activity is clear over both recessions and expansions. Furthermore, the impact of uncertainty shocks is more pronounced when economic activity is depressed especially after shocks originate from the financial market, and not from news-based policy uncertainty in Korea.

Keywords: Uncertainty shocks, Smooth transition vector autoregression, Asymmetric dynamics, Recessions

JEL Classification: C32, E32, E52

Suggested Citation

Larcher, Kevin and Kim, Jaebeom and Kim, Youngju, Uncertainty Shocks and Asymmetric Dynamics in Korea: A Nonlinear Approach (April 26, 2018). Bank of Korea WP 2018-12. Available at SSRN: https://ssrn.com/abstract=3168910 or http://dx.doi.org/10.2139/ssrn.3168910

Kevin Larcher

Oklahoma State University - Stillwater - Department of Economics & Legal Studies in Business ( email )

201 Business Building
Stillwater, OK 74078-0555
United States

Jaebeom Kim (Contact Author)

Oklahoma State University - Stillwater ( email )

Stillwater, OK 74078-0555
United States

Youngju Kim

Economic Research Institute, The Bank of Korea ( email )

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

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