integration with the global economy: a structural macroeconometric modelling of korea
DESCRIPTION
Integration with the Global Economy: A Structural Macroeconometric Modelling of Korea. Jarir Ajluni. Background. Background: The Korean Miracle. Key Achievements of the Korean Economy Growth. (GDP per capita doubled 11 times during 1960 – 2003) - PowerPoint PPT PresentationTRANSCRIPT
Integration withIntegration with
the Global Economy:the Global Economy:
A StructuralA Structural
MacroeconometricMacroeconometric
Modelling of KoreaModelling of Korea
Jarir Ajluni
Background
Background: The Korean Miracle
Key Achievements of the Korean Economy
Growth. (GDP per capita doubled 11 times during 1960 – 2003)
Exporting Boom. (Gross exports increased by 6000 times!)
Industrialisation (increased share of manufactured exports)
Financial Development (financial Depth in M2/GDP). Attractive destination for FDI. Joining the OECD!
Background: The Korean Miracle
Key Challenges to the Korean Economy
Oil Price Hikes (OPEC oil price shocks 1973 & 1979)
Integration (increased exposure to global fluctuations)
Geo-Political Constraints. Corruption. The Asian Crisis of 1997
(currency crisis, increased interest rates, doubled Unemployment, recession)
Modelling Strategy
The Theoretical Framework
The IS-LM-BP Framework R, ex
y
ISLMBP
Purchasing Power Parity PPP pep
Rpmy )(yyppeRR )(
yRppey )(1
LM
BP
IS
)5....(..................................................
)5..(..........
)5...(..........
)5(...........................................)(
434241044
13353433323103,3
272625242322022
111312011
dpped
ctdyppeRRyd
byRppeyd
atdyRpmd
ttttt
tttttttt
ttttttt
ttt
Core Model
Econometric Formulation of IS-LM-BP-PPP leads to:
Error terms above are “Deviations from Equilibrium”
Classifying trading partners
Trading partners are grouped into:
I. United States (US).
II. Rest of the G7 (RG7).
III. Rest of the OECD countries (ROECD).
IV. Developing Oil Exporting Countries (DOEC).(including OPEC & non-OPEC exporters)
V. Rest of Developing Trading Partners (RDTP).
)1.6(......
1
W
fhfthft
hfthfthft
IMEX
IMEX
)2.6(..............
1
1
W
fhfthft
F
fhfthft
hjt
IMEX
IMEX
)3.6(.......
1
1
1
1
N
jhjt
W
fhft
Construction of the Trade Weights
Country Trade Weights (h: home f: foreign economy)
Regional Trade Weights (h: home j: Region)
Aggregation conditions holds:
Directions of Trade 1980 - 2000
24%
33%6%
24%
13%
US RG7 ROECD DOECs RDTPs
21%
26%
8%
20%
25%
US RG7 ROECD DOECs RDTPs
36% of trade towards Developing countries 45 % of trade towards Developing countries
Importance of the G7 group: US and Japan
)8(..1 1 1
111
0
q
i
N
j
q
ititititjij
N
j
tjj
q
iithitth
q
i
q
ititititGitG
q
iithitth
1 111
10 )9(.....
)7.....(1 1
N
j
F
ffhfthjtGt X
Construction of the Model
Global vector by using trade weights of (6.1) (6.2)
VAR in (8) would be written in the form of (9)
VECM & Partial Systems
)10.........(1
ti
itiitt t
G
h
G
h
G
h
G
h
X
X
it
p
i Xi
Xi
it
X
X
t
X
X
Gt
th
c
c
1
1
Gthtt Let vector Z be:
Then the VECM of (9) would be :
tGtGtGtGtGt Rmpy ,,,,
hththththt Rmpy ,,,
then we could split (10) into:
Weak Exogeneity imply: 0GtX
434241
34353331
272326232524
1213
0000010
010010
0001
00000010
Identification
krrkkk
)10.........(1
ti
itiitt t
Recall VECM:
applying restrictions from (5a – 5d) derived from IS-LM-BP-PPP.
Empirical Results
Presence of 4 Cointegration relationships. Identification restrictions rejected. Weak Exogeneity of Global Vector & Oil Price. Low Capacity for an Independent Monetary Policy. Evidence on higher interest rates strangling the
economy (Stiglitz was right!).
Empirical Results
Response of yResponse of p
Respose of e
Impulse Response Functions
Response of (m-p)
Response to domestic monetary policy shock
Response of y
Response of (m-p)
Response of p
Response of e
Response to foreign monetary policy shock
Response of R
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
Response to foreign monetary policy shock
Foreign Monetary Policy Shock
-0.1
-0.075
-0.05
-0.025
0
0.025
0.05
0.075
0.1
0.125
0.15
0.175
0.2
0.225
0.25
0.275
0.3
0.325
0.35
0.375
0.4
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
step
IRF of y IRF of p IRF of (m-p) IRF of e IRF of R
Emphasise the relative responsiveness
Oil Price Shock
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
step
IRF of y IRF of p IRF of (m-p) IRF of e IRF of R
Raising the Interest Rate is NOT effective in generating capital inflow supporting the exchange rate, other factors should be considered.
High responsiveness of the Interest Rate suggest Monetary
policy would not be independent and should target domestic financial system & inflation NOT the exchange rate.
The importance of adjusting to foreign monetary policy shocks: The Best Response proposition.
Policy Implications
7.2
7.4
7.6
7.8
4.45
4.5
4.55
4.6
7.5
88.
5
510
1520
25
6.8
77.
27.
41997q1 1999q1 2001q1 2003q1
1997q1 1999q1 2001q1 2003q1 1997q1 1999q1 2001q1 2003q1
Forecast for y_sa Forecast for p Forecast for h
Forecast for R Forecast for ex
forecast observed
Testing the Model’s forecasting validity
Root Mean Square Errors: y : 0.33429p : 0.278432m-p: 0.65651R :26.25877e : 0.960