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The effects of globalization on macroeconomic dynamics in a trade-dependent economy : The case of Korea

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Frame of Image Research Institute, Bank of Korea, 39 Namdaemunno, Jung-Gu, Seoul, Korea, E-mail: pshlhk@bok.or.kr We would like to thank seminar participants at the Bank of Korea for comments and discussions. Professor Milani acknowledges and is grateful for the financial support provided by the Bank of Korea regarding this research project. All remaining errors are our own.
Contents
Ⅰ. Introduction ······················································································ 1 Ⅱ. Small Open Economy Model ······················································ 6 2.1 Model Description ························································································· 6 2.1.1 Households ···························································································· 6 2.1.2 Firms ········································································································ 9 2.1.3 Exchange Rate, Terms of Trade, Monetary Policy ················ 10 2.2 Model Summary ··························································································· 12 2.3 Non-Fully Rational Expectations ····························································· 14 Ⅲ. Estimation Details ········································································· 16 3.1 State Space ···································································································· 16 3.2 Data ··············································································


Full Text
Title The effects of globalization on macroeconomic dynamics in a trade-dependent economy
Similar Titles
Sub Title

The case of Korea

Material Type Reports
Author(English)

Milani, Fabio; Park, Sung Ho

Publisher

[Seoul]:The Bank of Korea

Date 2013-05
Series Title; No BOK Working Paper / no. 2013-13
Pages 41
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Macroeconomics
Holding The Bank of Korea; KDI School

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.