Macroeconomic Dynamics in Korea During and after Global Financial Crisis: A Bayesian DSGE Approach

Abstract

We estimate a medium-scale DSGE (dynamic stochastic general equilibrium) model, including a financial accelerator and the search and matching framework in labor markets, for the Korean economy using the Bayesian technique. The estimated model provides the following findings. The recent sluggishness in GDP growth can be explained by slow technology growth, while decline in CPI inflation is affected by falling markup in domestic homogenous goods production and negative intertemporal consumption preference. While wage, unemployment and total labor hours are influenced by various factors, households’ weak bargaining power causes slow wage recovery while pushing the unemployment rate down. There was a spillover from non-big-5 to big-5 firms during the financial crisis. Monetary and fiscal policy has been mostly conservative in the post-crisis period.