This paper attempts to develop a simple model to explain the dynamics of inflation in Korea. Inspite of the very small size of the model, comprising only three equations, and its highly aggregate nature, the simulation closely approximated the actual past rates of inflation and real GNP growth.
Since real GNP is an endogenous variable in this model, the interaction between prices and real GNP is fully reflected. The price level is viewed to be determined in the adjustment process of both the money market and the product market. The more money that is supplied per product available and the higher the speed of transactions, the more rapidly prices rise. Meanwhile, given the supply capacity of the economy in the short run, prices should rise quickly as costs increase rapidly and real GNP approaches the full-employment level. Among the important cost elements, the wage rate has been selected as an endogenous variable because of its highly endogenous nature. This simultaneous system and the two-stage estimation of the model are expected to eliminate a simultaneous equation bias and the error arising from inaccurate specification.
- The Dynamics of Inflation in Korea
- Nam, Sang-Woo남상우
- Korea Development Institute