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Financial Factors in the Business Cycle of a Small Open Economy: The Case of Korea

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  • Junhee Lee

    ()

  • Wooheon Rhee

    ()

Abstract

Financial factors influencing the business cycle have received considerable attention in recent years in the aftermath of the global financial crisis in 2008. This paper examines the role of financial factors in the business cycle by considering Korea, a small open economy, that experienced a severe financial crisis in 1997 as well as the recent global financial crisis. We estimate small open economy Bayesian DSGE (dynamic stochastic general equilibrium) models with financial factors and analyze the role of these financial factors in the business cycle in the context of Korea. The results indicate that the model based on an endogenous financial accelerator and a modified monetary policy rule provides a better explanation to the data than that without the financial factors and justify the recent attention to financial factors influencing the business cycle. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11079-013-9272-x
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 5 (November)
Pages: 881-900

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Handle: RePEc:kap:openec:v:24:y:2013:i:5:p:881-900

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Financial accelerator; International comovement; Net worth shock; DSGE model; Bayesian estimation; E32; E44;

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References

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  1. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
  2. Alejandro Justiniano & Bruce Preston, 2008. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," NBER Working Papers 14547, National Bureau of Economic Research, Inc.
  3. Selim Elekdag & Alejandro Justiniano & Ivan Tchakarov, 2006. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 2.
  4. Urban Jermann & Vincenzo Quadrini, 2009. "Macroeconomic Effects of Financial Shocks," NBER Working Papers 15338, National Bureau of Economic Research, Inc.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  6. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
  7. Urban Jermann & Vincenzo Quadrini, 2012. "Erratum: Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1186-1186, April.
  8. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.
  9. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
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