The effects of globalization on macroeconomic dynamics in a trade-dependent economy: The case of Korea ¬リニ¬リニ¬リニ

a r t i c l e i n f o Global slack hypothesis Inflation expectations Openness Small open economy DSGE model Korea 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 South 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, by the end of the sample, due in large part (roughly 70%) to global shocks (and shocks that are open-economy in nature). One of the most significant changes that affected the world economy over the last three decades has been the rapid increase in trade integration among national economies. In terms of economic research, the process of globalization has spawned interest, in particular, in the fields of international trade and labor economics, with researchers predominantly focusing their attention on the role of globalization as a potential leading cause of the increase in wage inequality across skill levels in the U.S. and other countries. Research on the implications of globalization at the macroeconomic level, however, has somewhat lagged behind. But globalization is also likely to produce a variety of effects on the macroeconomy. the potential impact of globalization on macroeconomic variables and monetary policy, as well as the challenges that it poses for state-of-the-art models. With regard to the dynamics of macrovariables, these debates played a central role in the literature that introduced the so-called globalization hypothesis (GH), or, alternatively, the 'global slack' hypothesis, whose central claim states that global factors, in contrast to domestic factors, have become progressively more influential in determining domestic macroeconomic aggregates. The existing empirical evidence on the effects of globalization at the macroeconomic level, however, has so far been mixed at best. For example , Borio and Filardo (2007) find that domestic inflation rates, even in the U.S., have …