This study aims to develop a systematic understanding of the inflation that is currently taking place in Korea, by examining and analyzing how policy-related and exogenous variables affect the relationship between price and total demand.
From the numerous approaches of understanding inflation, this study chooses two that appear to be best suited to analyze current status of the Korean economy. The Phillips curve model, which defines inflation on the basis of anticipated inflation rates and demand pressure, is unsuited to the current Korean situation as the inflation rate fluctuates almost at random, subject to the price of imported goods and the direct policy actions of the Korean government.
This study therefore attempts to explain inflation in Korea by focusing on the cost factors, such as exchange rates, unit import costs, public fees and taxes, and wages. This study also explains the correlation between the anticipated changes in the inflation rate (resulting from the injection of demand pressure as a variable affecting wages and their interactions with inflation) and the Phillips curve. This study also examines Korean inflation by way of the currency theory, which holds that it is the amount of currency in circulation that decides the basic patterns and strength of inflation. The former cost model assumes little to no effects of inflation-anticipating variables, except for demand pressure that exerts significant influence on prices via wages. The currency model, on the other hand, asserts that the public interest rate and inflation-anticipating variables play significant roles in explaining price fluctuations.
In order to understand how inflation occurs and evolves, we need to assume total demand and run simulations on its dynamics. This study provides an explanation, based on the currency theory, for the total demand in the light of the real currency and commodity exports, and concludes that the currency theory-based simulation is likely to yield unreliable outcomes should it be required to decide the total demand and the price simultaneously. This study therefore ran a simulation of the total demand first, and let the currency-based prices be decided repeatedly and consistently. The simulations of inflation dynamics were satisfactory overall, as they assisted the calculation of changes in elasticity that changes in the major policy may cause to prices over time, from the perspectives of both cost and currency.
In conclusion, the cost increase model is able to produce significantly accurate inflation predictions in the short run. It is, however, the currency policy that determines the long-term direction of inflation. The fact that the cost increase model fails to adequately capture the influence of currencies may be overcome by internalizing the effects of exchange rates, public dues and fees, and other cost factors into prices.
비용 및 통화측면의 인플레 진행과정(Cost and currency dimensions of inflation in Korea)
|Journal Title; Vol./Issue||한국개발연구:vol. 3(issue 4)|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||KDI; KDI School|