Output, Inflation, and the Balance of Payments in a Small, Fixed-Exchange Rate Economy: Tests with Data for Korea, 1960-1973

Abstract

Increasing interdependence among economies in recent years has stimulated the development of models that take account of such interdependence inorder to more adequately analyze an individal country's economic activity and inflation. At the same time, effects of fiscal, monetary, and exchange rate policies in a small open economy on its output, inflation and balance of payments have been discussed at an abstract level. Little systematic empirical work has yet been undertaken to examine the intersting implications emerging from these recent theoretical developments. In this paper, an attept is made to provide an econometric framework explicitly allwoing for external transations for goods, servics, and financial assets and for the dependence of monetary changes on fiscal deficits and the balance of payments. The models is applied to a highly open but small economy, the Republic of Korea, to demonstrate the usefulness of this framework.