Korean Inflation during the U. S. Military Administration of 1945-48

Abstract

In Korea the general state of impoverishment created income levels too low to collect sufficient tax revenues to support the government's spending goal. Thus the U.S. military administration was forced to rely on printing substantial quantities of money to finance its real expenditure gap, thereby creating a high rate of inflation. While fiscal pressure was similar, there was significant difference in the magnitude of the inflation. For example, the monthly average inflation rate reached a peak of 11 percent in Korea compared to a monthly peak of 322 percent in Germany. This comparatively moderate rate of inflation may have allowed the Korean experience to go relatively unnoticed by academics,' yet it affords an opportunity to examine the dynamic process of inflation during a period with circumstances similar to those that produced the more frequently studied episodes of hyperinflation. Section II of the paper briefly describes the post World War II Korean economy. Section III will employ a structural vector autoregression (SVAR) to model the dynamic process of inflation and discusses the long-run and contemporaneous restrictions employed to identify the structural parameters. The data and subsequent econometric results are reported in section IV. The results will indicate that the moderately high rate of inflation during the U.S. military administration can be largely explained by velocity shocks to money demand, suggesting that a