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

Abstract

We estimate a medium-scale DSGE 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 shows that the recent sluggishness in GDP growth can be explained by slow technology growth, and the decline in CPI inflation is affected by a falling markup in domestic homogeneous goods production and a negative intertemporal consumption preference. Although wages, unemployment, and total labor hours are influenced by various factors, households' weak bargaining power causes a slow recovery in wages, while pushing the unemployment rate down. There was also a spillover from non-big-5 to big-5 firms during the global financial crisis, while monetary and fiscal policy has been mostly conservative in the post-crisis period.