Consumption Heterogeneity and Driving Forces of Business Cycles in Korea

This paper sets up a small open economy TANK model with constrained households to address the driving forces of business cycles in Korea. The estimated model via Bayesian methodology shows that nearly half of households have lacked access to financial markets before the Asian financial crisis. The domestic productivity shock has been the main driving force of output fluctuations since the 1980s. However, the influence of the foreign demand shock on consumption has declined over time, while the relative importance of domestic factors has increased as the Korean economy has outgrown from its export-driven and import-dependent industrial structures after the Asian financial crisis. The estimated share of constrained households has substantially decreased with the financial market deepening and liberalization in the globalization era. The monetary policy shock has been most important factor in the variation of inflation in Korea