Time-varying Effects of Global and Domestic Uncertainty on the Korean Economy

So Jung Hwang and Hyunduk Suh
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So Jung Hwang: Inha University

No 2020-3, Inha University IBER Working Paper Series from Inha University, Institute of Business and Economic Research

Abstract: This study analyzes the overall and time-varying effects of global and domestic uncertainty on the Korean economy by estimating constant parameter and time-varying parameter vector autoregressive models. Global and Korea-specific uncertainty are measured using the method proposed by Mumtaz and Theodoridis (2017). We find a substantial increase in domestic uncertainty during the 1997–1998 Asian Financial Crisis and in global uncertainty during the 2008–2009 Global Financial Crisis. These uncertainty shocks account for a significant part of macroeconomic fluctuations in Korea during the crisis periods. A rise in both the uncertainty measures has an adverse impact on the Korean economy by lowering stock market returns and output growth, and by creating inflation caused by the depreciation of the Korean won. Although the results provide indications that the adverse impact of uncertainty shocks has weakened over time, the degree of structural change is quantitatively small.

Keywords: Global uncertainty; Korea-specific uncertainty; Korean economy; TVP-VAR (search for similar items in EconPapers)
JEL-codes: E20 F44 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2020-08
New Economics Papers: this item is included in nep-mac
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