Business Cycles in an Emerging Economy with Financial Frictions: The Case of Korea

Abstract

This paper investigates sources of business cycles in Korea to shed some lights on the effects of economic crisis and the role of financial frictions. For this purpose, it sets up a canonical international real business cycle model augmented by international financial market frictions as in Garcia-Cicco, Pancrazi, and Uribe (2010). The paper applies Watson's (1993) measure of fit to evaluate the role of financial market frictions over Korean business cycles. It finds that the financial frictions have played a limited role in the economic fluctuations in Korea before and after the 1997 financial crisis.