Business Cycles and Limited Participation in Financial Markets: The Case of Korea

Abstract

This paper investigates sources of business cycles in Korea to shed some lights on the role of limited participation in financial market along the line of Christiano (1992) and King and Watson (1996). For this purpose, the paper sets up a small open economy model with two agents subject to limited participation in financial markets. Applying Watson (1993)'s measure of fit to evaluate the role of limited participation over Korean business cycles, it finds that the household's limited participation has played an important role in the business cycle in Korea after the Asian financial crisis.