The Effects of Globalization on Macroeconomic Dynamics in a Trade-Dependent Economy: the Case of Korea

Fabio Milani and Sung Ho Park
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Sung Ho Park: Economic Research Institute, Bank of Korea

No 141502, Working Papers from University of California-Irvine, Department of Economics

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 South 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. Fluctuations in Korean output, inflation, and interest rates, which were driven for the most part by domestic shocks in the early 1990s are, by the end of the sample, due in large part (roughly 70%) to global shocks (and shocks that are open-economy in nature).

Keywords: Globalization; Inflation dynamics; Global slack hypothesis; Inflation expectations; Openness; Small open eonomy DSGE model; Korea (search for similar items in EconPapers)
JEL-codes: E31 E32 E50 E52 E58 F41 F62 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-12
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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https://www.economics.uci.edu/files/docs/workingpapers/2014-15/14-15-02.pdf (application/pdf)

Related works:
Journal Article: The effects of globalization on macroeconomic dynamics in a trade-dependent economy: The case of Korea (2015)
Working Paper: The Effects of Globalization on Macroeconomic Dynamics in a Trade-Dependent Economy: the Case of Korea (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:141502

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