An examination of macroeconomic fluctuations in Korea exploiting a Markov-switching DSGE approach ¬リニ

a r t i c l e i n f o This paper estimates a Markov-switching dynamic stochastic general equilibrium (MS-DSGE) model that allows shifts in the monetary policy rule coefficients as well as the shock volatilities with Korean data ranged from 1976 to 2013. We find that allowing for the regime-switching aspect both in monetary policy rules and shock volatil-ities is a crucial setup in improving the model's fit with Korean data. The regime estimates indicate that monetary policy more aggressively reacts to inflation, but less strongly to output, after launching the Inflation Targeting (IT) policy in the late 1990s. The identified regimes have three implications on macroeconomic performance in Korea. First, the introduction of the IT monetary policy has contributed to a sharp reduction in the level as well as the volatility of inflation in the 2000s. Second, technology shocks are the most important drivers of output fluctuations in Korea as the major economic crises in Korea are mainly explained by adverse shocks on technology. Finally , it would have been possible to achieve higher output and lower inflation simultaneously if the IT monetary policy regime was maintained over the entire sample period. This study seeks to empirically assess how monetary policy behavior in Korea has changed in response to structural shocks across different policy regimes, which are identified by estimating a Markov-switching dynamic stochastic general equilibrium (MS-DSGE) model. We posit that Korean economy may work as a natural laboratory for regime switching approaches. In order to rationalize this argument, Fig. 1 plots key macroeconomic time series of Korea from 1976:Q3 to 2013:Q3, in which large swings in output, inflation, and exchange rate are readily observed after outbreaks of major macroeconomic episodes for the Korean economy. Over the last four decades, Korean economy had suffered from three significant economic crises—the second oil crisis in the late 1970s, the Asian currency crisis in 1997–98, and the global financial crisis in 2008–09. All these episodes have caused the severe recessions as well as the surges in price level and exchange rate. 1 Despite their similar patterns in outcomes, the aftermath of each episode entails quite differentiated characteristics, as well documented in Cho (2007) and Huh and Nam (2010). In particular, the Asian currency crisis might be the most crucial economic episode for the Korean economy. This economic turmoil has resulted in a sequence of institutional changes in Korea's economic stabilization …