Firm entry, Search and Matching in a Small Open Economy Faced with Uncertainty Shocks: The case of Korea

This paper investigates the impact of uncertainty shocks in a small open economy with search and matching frictions, endogenous job separation and rm entry. We rst develop our empirical analysis in the context of the Korean economy, as all dimensions of the model are relevant in this country. An increase in uncertainty lowers output, consumption, investment and job nding rate, while raising unemployment and job separations. We also supplement the existing empirical evidence by looking at rm dynamics, real exchange rate and current account behavior. Increased uncertainty gen- erates current account surplus, real exchange rate depreciation and reduces the number of rms in the economy. In our theoretical framework, we illustrate new transmissions mechanism that are ignored in the literature. The interaction of search frictions, rm entry and open economy leads to sizable macroeconomic eects of heightened uncer- tainty. Moreover, the model's predictions are consistent with empirical ndings.