IDEAS home Printed from https://ideas.repec.org/a/eee/jjieco/v42y2016icp79-99.html
   My bibliography  Save this article

Financial market integration, exchange rate policy, and the dynamics of business and employment in Korea

Author

Listed:
  • Cacciatore, Matteo
  • Ghironi, Fabio
  • Lee, Yurim

Abstract

We study the consequences of different degrees of international financial market integration and exchange rate policies in a calibrated, medium-scale model of the Korean economy. The model features endogenous producer entry into domestic and export markets and search-and-matching frictions in labor markets. This allows us to highlight the consequences of financial integration and the exchange rate regime for the dynamics of business creation and unemployment. We show that, under flexible exchange rates, access to international financial markets increases the volatility of both business creation and the number of exporting plants, but the effects on employment volatility are more modest. Pegging the exchange rate can have unfavorable consequences for the effects of terms of trade appreciation, but more financial integration is beneficial under a peg if the economy is subject to both productivity and terms of trade shocks. The combination of a floating exchange rate and internationally complete markets would be the best scenario for Korea among those we focus on.

Suggested Citation

  • Cacciatore, Matteo & Ghironi, Fabio & Lee, Yurim, 2016. "Financial market integration, exchange rate policy, and the dynamics of business and employment in Korea," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 79-99.
  • Handle: RePEc:eee:jjieco:v:42:y:2016:i:c:p:79-99
    DOI: 10.1016/j.jjie.2016.09.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0889158316300296
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jjie.2016.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Diego Comin & Norman Loayza & Farooq Pasha & Luis Serven, 2014. "Medium Term Business Cycles in Developing Countries," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 209-245, October.
    2. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    3. Milani, Fabio & Park, Sung Ho, 2015. "The effects of globalization on macroeconomic dynamics in a trade-dependent economy: The case of Korea," Economic Modelling, Elsevier, vol. 48(C), pages 292-305.
    4. Francesc Obiols Homs, 2012. "Search and matching in the labor market without unemployment insurance," 2012 Meeting Papers 340, Society for Economic Dynamics.
    5. Haltiwanger, John C. & Scarpetta, Stefano & Schweiger, Helena, 2006. "Assessing Job Flows across Countries: The Role of Industry, Firm Size and Regulations," IZA Discussion Papers 2450, Institute of Labor Economics (IZA).
    6. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    7. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    8. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    9. George Alessandria & Horag Choi, 2007. "Do Sunk Costs of Exporting Matter for Net Export Dynamics?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 289-336.
    10. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
    11. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    12. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    13. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    14. Sims,Christopher A. (ed.), 1994. "Advances in Econometrics," Cambridge Books, Cambridge University Press, number 9780521444606.
    15. Barbara Petrongolo & Christopher Pissarides, 2006. "Scale Effects in Markets with Search," Economic Journal, Royal Economic Society, vol. 116(508), pages 21-44, January.
    16. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    17. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 706-727, April.
    18. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353, National Bureau of Economic Research, Inc.
    19. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    20. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007, Elsevier.
    21. Monique Ebell & Christian Haefke, 2009. "Product Market Deregulation and the U.S. Employment Miracle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 479-504, July.
    22. Matteo Cacciatore & Fabio Ghironi & Stephen J. Turnovsky, 2015. "Inflation Targeting and Economic Reforms in New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 145-198, September.
    23. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    24. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    25. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, July.
    26. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    27. St?phane Auray & Aur?lien Eyquem, 2014. "Welfare Reversals in a Monetary Union," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 246-290, October.
    28. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, February.
    29. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
    30. Turnovsky, Stephen J., 1985. "Domestic and foreign disturbances in an optimizing model of exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 151-171, March.
    31. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    32. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    33. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    34. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
    35. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    36. Eichengreen, Barry, 2004. "Monetary and Exchange Rate Policy in Korea: Assessments and Policy Issues," CEPR Discussion Papers 4676, C.E.P.R. Discussion Papers.
    37. Heathcote, Jonathan & Perri, Fabrizio, 2014. "Assessing International Efficiency," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 523-584, Elsevier.
    38. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 217-227.
    39. Sims,Christopher A. (ed.), 1994. "Advances in Econometrics," Cambridge Books, Cambridge University Press, number 9780521444590.
    40. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
    41. Alberto Ortiz & Federico Sturzenegger, 2007. "Estimating Sarb'S Policy Reaction Rule," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 659-680, December.
    42. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    43. Andrew B. Bernard & J. Bradford Jensen, 2004. "Why Some Firms Export," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 561-569, May.
    44. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    45. Arseneau, David M. & Chugh, Sanjay K., 2008. "Optimal fiscal and monetary policy with costly wage bargaining," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1401-1414, November.
    46. Aw, Bee Yan & Chung, Sukkyun & Roberts, Mark J, 2000. "Productivity and Turnover in the Export Market: Micro-level Evidence from the Republic of Korea and Taiwan (China)," The World Bank Economic Review, World Bank Group, vol. 14(1), pages 65-90, January.
    47. Alven H.S. Lam, 2000. "Republic of China (Taiwan)," American Journal of Economics and Sociology, Wiley Blackwell, vol. 59(5), pages 327-336, November.
    48. Chung, Jaesik & Jung, Yongseung & Yang, Doo Yong, 2007. "Optimal monetary policy in a small open economy: The case of Korea," Journal of Asian Economics, Elsevier, vol. 18(1), pages 125-143, February.
    49. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    50. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Exchange rate determination under interest rate rules," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 971-993, October.
    51. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, May.
    52. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, 08.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cacciatore, Matteo & Ghironi, Fabio, 2021. "Trade, unemployment, and monetary policy," Journal of International Economics, Elsevier, vol. 132(C).
    2. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    3. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2015. "The domestic and international effects of euro area market reforms," Research in Economics, Elsevier, vol. 69(4), pages 555-581.
    4. Matteo Cacciatore & Fabio Ghironi & Stephen J. Turnovsky, 2015. "Inflation Targeting and Economic Reforms in New Zealand," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 145-198, September.
    5. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    6. Matteo Cacciatore & Giuseppe Fiori, 2016. "The Macroeconomic Effects of Goods and Labor Marlet Deregulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 1-24, April.
    7. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market reforms in the time of imbalance," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 69-93.
    8. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    9. Etro, Federico, 2017. "Research in economics and macroeconomics," Research in Economics, Elsevier, vol. 71(3), pages 373-383.
    10. Abo-Zaid, Salem, 2013. "Optimal monetary policy and downward nominal wage rigidity in frictional labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 345-364.
    11. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    12. Colciago, Andrea & Rossi, Lorenza, 2011. "Endogenous market structures and labour market dynamics," Bank of Finland Research Discussion Papers 12/2011, Bank of Finland.
    13. Dossche, Maarten & Lewis, Vivien & Poilly, Céline, 2019. "Employment, hours and the welfare effects of intra-firm bargaining," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 67-84.
    14. Sergio A. Lago Alves, 2018. "Monetary Policy, Trend Inflation, and Unemployment Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 637-673, June.
    15. Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.
    16. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    17. Thomas, Carlos, 2008. "Search and matching frictions and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(5), pages 936-956, July.
    18. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    19. Federico Etro & Andrea Colciago, 2010. "Endogenous Market Structures and the Business Cycle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1201-1233, December.
    20. Matteo Cacciatore & Romain Duval & Giuseppe Fiori & Fabio Ghironi, 2021. "Market Reforms at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 745-777, June.

    More about this item

    Keywords

    Business creation; Exchange rate policy; International financial integration; Monetary policy; Risk sharing; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jjieco:v:42:y:2016:i:c:p:79-99. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622903 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.