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The Purpose of This Study is To understand the Growth of Korean Economy since 1990 •Based on two linear stochastic models, which contrast the institutional changes Korea went through after the Financial Crisis •To measure the relative contributions of various shocks to the growth path of Korea •Demand, supply (productivity), oil shocks,…
International Financial market and Korean Economy Class Note 10 The Economic Growth of Korea after 1990: Identifying Contributing Factors from Demand and Supply Sides This material is based on Chapter of edited by Takatoshi Ito and Chin Hee Hahn (Edward Elgar (2010) Introduction(1/2) The Purpose of This Study is To understand the Growth of Korean Economy since 1990 • Based on two linear stochastic models, which contrast the institutional changes Korea went through after the Financial Crisis • To measure the relative contributions of various shocks to the growth path of Korea • Demand, supply (productivity), oil shocks,… Introduction(2/2) Methodology Introduce two systems of linear stochastic difference equations, each of which represents the Korean economy before and after the Financial Crisis Following Blanchard and Quah(1989), (1) Derive longrun restrictions and (2) Estimate SVAR models with them Shocks are roughly classified into demand, supply and foreign shocks Observations(1/2) Real GDP Growth(1971.1/4~2007.2/4) (Quarterly, Year-on-Year, %) 1971~1979 1980~1989 1990~1999 2000~2007.2/4 total Average 8.1 7.4 6.0 5.0 6.7 St.Dev 3.4 3.8 4.8 2.1 3.9 • Speed of Growth is decelerating “ Is it a ominous sign of Slowdown? Or Are we there yet?” Observations(2/2) Real GDP Growth (Year-on-Year % Change, Yearly Growth Rate, %) 35 30 25 20 15 10 -5 -10 -15 -20 -25 -30 -35 -40 1971 1974 1977 1980 1983 1986 1989 1992 1995 lrGDP Institutional Changes after the Currency Crisis • Restructuring in Financial Sectors • Inflation Targeting • A Floating Exchange Rate System 1998 2001 lrGDP(s.a) 2004 2007 Discussions Shim(2001) •Assuming a closed economy •Shocks are arranged so as to have a lower triangular covariance matrix Kim(2005) •Analyzing the impact of foreign shocks on domestic economy Oh(2007) •An open economy version of B-Q(1989), consisting of Import Volume, GDP and CPI Limitations •Not based on economic models •Doesn’t consider the institutional changes after the Crisis Sources of Shocks and Transmission Channels(1/2) Demand Shocks •(Domestic) Idiosyncrasies in Consumption, Investment, Fiscal Stance and FX Market •(Foreign) TOT , the world economic growth •Supply Shocks •(Domestic) Changes Factor Productivities and TFP •(Foreign) Changes in the Prices of Raw Materials including Oil and Technological Progress Sources of Shocks and Transmission Channels(2/2) Changes of the Economic Environments •(Domestic) Restructured financial market, inflation targeting, and flexible exchange rate •(Foreign) Global phenomena of low interest rate and housing price hike, and the emergence of China as a world economic power Estimated Equations and Identifications(1/8) Backbone •Blanchard and Quah(1989) •Stock and Watson(2002) •With an additional assumption of “A small open economy” Estimated Equations and Identifications(2/8) A Inflation Targeting and Flexible Exchange Rate • Modified from Stock and Watson(2002) • A monetary authority follows a Taylor rule • A small open economy: TOT and Exchange rate IR Analysis (2/14) A Inflation Targeting and Flexible Exchange Rate • 2000.1/4~2007.2/4 Real GDP Price index Interest rate Exchange rate Note: Each of shock 1,2,3,4 represents a shock from productivity, or aggregate demand, or price, or exchange rate FEVD Analysis (3/14) A Inflation Targeting and Flexible Exchange Rate • 2000.1/4~2007.2/4 Growth rate of real GDP shock shock shock shock Interest Rate shock shock shock Inflation shock shock shock shock Volatility of the exchange rate shock shock shock shock shock Note: Each of shock 1,2,3,4 represents a shock from productivity, or aggregate demand, or price, or exchange rate IR and FEVD Analysis (4/14) B Aggregate Targeting and Fixed Exchange Rate (1991.1/4~1997.3/4) Real GDP Changes in growth rate of real GDP shock shock shock Interest rate Monetary aggregate Changes in interest rate Changes in monetary aggregate shock shock shock shock shock Note: Each of shock 1,2,3 represents a shock from productivity, or aggregate demand, or price shock IR and FEVD Analysis(5/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1970.1/4~2007.2/4) Growth rate of real GDP Changes in growth rate of real GDP shock shock Unemployment rate Changes in unemployment rate shock shock Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(6/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1970.1/4~1979.4/4) Growth rate of real GDP Changes in growth rate of real GDP shock shock Unemployment rate Changes in unemployment rate shock shock Note: Each of shock 1,2 represents a shock from demand side or supply IR and FEVD Analysis(7/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1980.1/4~1989.4/4) Growth rate of real GDP Changes in growth rate of real GDP shock shock Unemployment rate Changes in unemployment rate shock shock Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(8/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1990.1/4~1999.4/4) Growth rate of real GDP Changes in growth rate of real GDP shock shock Unemployment rate Changes in unemployment rate shock shock Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(9/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (2000.1/4~2007.2/4) Growth rate of real GDP Changes in growth rate of real GDP shock shock Unemployment rate Changes in unemployment rate shock shock Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(10/14) D An Extension of B-Q(1989)(3 variables and shocks) (1970.1/4~2007.2/4) Real GDP Changes in Growth Rate of Real GDP shock shock shock shock Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock shock shock Note: Each of shock 1,2,3 represents a shock from demand, or productivity, or price shock shock IR and FEVD Analysis(11/14) D An Extension of B-Q(1989)(3 variables and shocks) (1970.1/4~1979.4/4) Real GDP Changes in Growth Rate of Real GDP shock shock shock shock Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock shock shock Note: Each of shock 1,2,3 represents a shock from demand, or productivity, or price shock shock IR and FEVD Analysis(12/14) D An Extension of B-Q(1989)(3 variables and shocks) (1980.1/4~1989.4/4) Real GDP Changes in Growth Rate of Real GDP shock shock shock shock Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock shock shock Note: Each of shock 1,2,3 represents a shock from demand, or productivity, or price shock shock IR and FEVD Analysis(13/14) D An Extension of B-Q(1989)(3 variables and shocks) (1990.1/4~1999.4/4) Real GDP Changes in Growth Rate of Real GDP shock shock shock shock Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock shock shock Note: Each of shock 1,2,3 represents a shock from demand, or productivity, or price shock shock IR and FEVD Analysis(14/14) D An Extension of B-Q(1989)(3 variables and shocks) (2000.1/4~2007.2/4) Real GDP Changes in Growth Rate of Real GDP shock shock shock Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock shock shock shock Note: Each of shock 1,2,3 represents a shock from demand, or productivity, or price shock shock Concluding Remarks(1/2) Summing up To measure relative contributions of various aggregate shocks to Korean economy since 1990s • By applying Blanchard and Quah(1989) to modifed versions of Stock and Watson(2002) Our models are special in that (1) they extend the closed economy of the original S-W(2002) to a small open economy and (2) they contrast the institutional changes in Korea after the Financial Crisis Concluding Remarks(2/2) Main Findings: Slowdown of economic growth since 2000, worried by both public and economists, seems to move in the same locus with the potential GDP growth The fluctuations of the economic growth are attributable mainly to supply shocks and such a pattern seems fortified since 2000 On the other hand, the market friendly institutional changes( the introductions of the inflation targeting and the flexible exchange rate system) may absorb shocks more effectively Overall, the magnitudes and the persistence of impulse responses tend to decrease in 2000s In addition, successfully coordinated low interest rate regime initiated by FRB in the early 2000s contributes to reducing shocks themselves [...]... contrast the institutional changes in Korea after the Financial Crisis Concluding Remarks(2/2) Main Findings: Slowdown of economic growth since 2000, worried by both public and economists, seems to move in the same locus with the potential GDP growth The fluctuations of the economic growth are attributable mainly to supply shocks and such a pattern seems fortified since 2000 On the other hand, the. .. represents a shock from demand side or supply side IR and FEVD Analysis(6/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1970.1/4~1979.4/4) Growth rate of real GDP Changes in growth rate of real GDP shock 1 shock 2 Unemployment rate Changes in unemployment rate shock 1 shock 2 Note: Each of shock 1,2 represents a shock from demand side or supply IR and FEVD Analysis(7/14)... shock from demand, or productivity, or price shock 2 shock 3 Concluding Remarks(1/2) Summing up To measure relative contributions of various aggregate shocks to Korean economy since 1990s • By applying Blanchard and Quah(1989) to modifed versions of Stock and Watson(2002) Our models are special in that (1) they extend the closed economy of the original S-W(2002) to a small open economy and (2) they... (2-variables and 2-shocks) (1980.1/4~1989.4/4) Growth rate of real GDP Changes in growth rate of real GDP shock 1 shock 2 Unemployment rate Changes in unemployment rate shock 1 shock 2 Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(8/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1990. 1/4~1999.4/4) Growth. .. Growth rate of real GDP Changes in growth rate of real GDP shock 1 shock 2 Unemployment rate Changes in unemployment rate shock 1 shock 2 Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(9/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (2000.1/4~2007.2/4) Growth rate of real GDP Changes in growth rate of real... shock 2 Note: Each of shock 1,2,3 represents a shock from productivity, or aggregate demand, or price shock 3 IR and FEVD Analysis(5/14) C B-Q(1989)’s Original Model (2-variables and 2-shocks) (1970.1/4~2007.2/4) Growth rate of real GDP Changes in growth rate of real GDP shock 1 shock 2 Unemployment rate Changes in unemployment rate shock 1 shock 2 Note: Each of shock 1,2 represents... Note: Each of shock 1,2 represents a shock from demand side or supply side IR and FEVD Analysis(10/14) D An Extension of B-Q(1989)(3 variables and 3 shocks) (1970.1/4~2007.2/4) Real GDP Changes in Growth Rate of Real GDP shock 1 shock 2 shock 3 shock 1 Price Index Unemployment Rate Changes in Inflation Changes in Unemployment Rate shock 2 shock 3 shock 1 Note: Each of shock... GDP, price and exchange rate, (T) interest rate • Demand shock( ε ty ), Price Shock( ε tπ ) -(P) real GDP, Price, (T) interest and exchange rate • Exchange rate shock( ε e ) t -(P) real GDP, (T) price, interest and exchange rate Estimated Equations and Identifications(5/8) B Aggregate Targeting and Fixed Exchange Rate • The monetary authority controls the Quantity of Money • By adjusting Money Growth •... NA 0 -(P) real GDP, (T) interest rate and money • Demand shock( ε ty ) - (P) real GDP and Money, (T) interest rate π • Price shock(ε t ) - (P) real GDP, (T) interest rate and money The Descriptions of the Data (1/3) Time Coverage and Notable Features • Source : BOK • Real GDP, Price, Exchange Rate (US $/KOR W) , Money : 1970.1/4~2007.2/4 • The yield of 1 year Government Bond : 2000.1/4~2007.2/4... friendly institutional changes( the introductions of the inflation targeting and the flexible exchange rate system) may absorb shocks more effectively Overall, the magnitudes and the persistence of impulse responses tend to decrease in 2000s In addition, successfully coordinated low interest rate regime initiated by FRB in the early 2000s contributes to reducing shocks themselves ... in the same locus with the potential GDP growth The fluctuations of the economic growth are attributable mainly to supply shocks and such a pattern seems fortified since 2000 On the other hand,...Introduction(1/2) The Purpose of This Study is To understand the Growth of Korean Economy since 1990 • Based on two linear stochastic models, which contrast the institutional changes Korea went through after. .. institutional changes Korea went through after the Financial Crisis • To measure the relative contributions of various shocks to the growth path of Korea • Demand, supply (productivity), oil shocks,… Introduction(2/2)