What are the Driving Forces of the Economic Downturn in Korea during COVID-19?

Abstract

We investigate the main driving forces of business cycles and heterogeneity across industries during the COVID-19 crisis in Korea. We build a small open economy model, solved up to the second-order, to fit the stylized facts of business cycles and employ several structural shocks as candidates of driving forces. In contrast to the financial crisis in 2008, the transitory productivity shock is the predominant source, although the permanent productivity shock is assigned less importance during the pandemic. Negative preference shocks rapidly reduce consumption in 2020Q1 but bounce back with upward pressure on consumption growth in 2020Q2. The services sector, especially accommodation and food, is the most adversely affected by structural shocks at the onset of the COVID-19 outbreak.

Keywords: COVID-19, Small open economy, Real business cycles

JEL Classification: E33, F4, H8