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

Author

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  • Fabio Milani

    (Department of Economics, University of California, Irvine)

  • Sung Ho Park

    (Economic Research Institute, The Bank of Korea)

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 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 due in large part (roughly 70%) to global shocks (and shocks inherent to an open-economy) by the end of the sample.

Suggested Citation

  • Fabio Milani & Sung Ho Park, 2014. "The Effects of Globalization on Macroeconomic Dynamics in a Trade-Dependent Economy: the Case of Korea," Working Papers 2014-13, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1413
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    Cited by:

    1. Fabio Milani & Sung Ho Park, 2019. "Expectations and Macro-Housing Interactions in a Small Open Economy: Evidence from Korea," Open Economies Review, Springer, vol. 30(2), pages 375-402, April.
    2. Karime Chahuán-Jiménez & Rolando Rubilar-Torrealba & Hanns de la Fuente-Mella, 2021. "Market Openness and Its Relationship to Connecting Markets Due to COVID-19," Sustainability, MDPI, vol. 13(19), pages 1-12, October.
    3. 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.
    4. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    5. Bin Shen & Jiang Zhang & Yixiao Li & Qiuhua Zheng & Xingsen Li, 2015. "International Trade Modelling Using Open Flow Networks: A Flow-Distance Based Analysis," PLOS ONE, Public Library of Science, vol. 10(11), pages 1-16, November.
    6. William A. Barnett & Unal Eryilmaz, 2022. "Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202203, University of Kansas, Department of Economics.
    7. Yao Li & Yugang He & Renhong Wu, 2023. "Traversing the Macroeconomic Terrain: An Exploration of South Korea’s Economic Responsiveness to Cross-Border E-Commerce Production Technology Alterations in the Global Arena," Sustainability, MDPI, vol. 15(15), pages 1-20, July.
    8. Saad, Ayhab F., 2021. "Institutional change in the global economy: How trade reform can be detrimental to welfare," Economic Modelling, Elsevier, vol. 95(C), pages 97-110.

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    More about this item

    Keywords

    Globalization; Inflation Dynamics; Global Slack Hypothesis; Openness; Inflation Expectations; Small Open Economy DSGE Model; Korea;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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