• East Asian Economic Review
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• v.21 no.2
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• pp.167-197
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• 2017

I build a small open economy (SOE) dynamic stochastic general equilibrium (DSGE) model to investigate the effect of a heterogeneous wage contract between regular and temporary workers on a macroeconomic volatility in a financially fragile economy. The imperfect financial market condition is captured by a quadratic financial adjustment cost for borrowing foreign assets, and the labor market friction is captured by a Nash bargaining process which is only available to the regular workers when they negotiate their wages with the firms while the temporary workers are given their wage which simply equals the marginal cost. As a result of impulse responsesto a domestic productivity shock, the higher elasticity of substitution between two types of workers and the lower weight on the regular workers in the firm's production process induce the higher volatilities in most variables. This is reasoned that the higher substitutability creates more volatile wage determination process while the lower share of the regular workers weakens their Nash bargaining power in the contract process.

• East Asian Economic Review
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• v.17 no.2
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• pp.161-206
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• 2013

Since the global financial crisis in 2008, the world economy has been suffering from the Great Recession characterized by high and persistent unemployment as well as drastic fall in asset prices. Real business cycle theory or new-Keynesian economics which has been the dominant paradigm in macroeconomics for the last four decades is unable to explain the high and persistent unemployment during the Great Recession. This implies that the economics of Keynes should be taken seriously again as a tool to explain the Great Recession. Farmer (2012) proposes a new way of interpreting the economics of Keynes by providing it with a solid micro-foundation based on labor markets with search. According to Farmer (2012), aggregate economic activity independently depends on the long-term self-fulfilling expectations about the stock prices. As a consequence, the government or the central bank should implement a policy that influences the public's confidence about the stock market. For an open economy like the Korean economy, it is not only stock price but also the price of asset such as house that matters more for the aggregate economic activity. Households in the Korean economy hold more than 70 percent of their wealth in the form of real estate asset, especially housing asset. This makes the public's confidence about the future prices of houses even more important in explaining the business cycles of the Korean economy. Policymakers should implement policies to improve the confidence of households about the housing market to recover from the recession caused by a fall in house prices. Little theoretical work has been done in explaining fluctuations in the aggregate economic activity from the point of house prices. This paper develops a small open economy model with traded and non-traded capital based on Farmer (2012) and shows that the aggregate economic activity also independently depends on the households' self-fulfilling expectations about the future prices of non-traded asset such as houses.

• International Area Studies Review
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• v.15 no.3
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• pp.239-261
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• 2011

The cyclicality of productivity has been one of the essential issues in macroeconomics. Since Solow(1957) developed the dominant approach to the measurement of productivity growth, Solow's approach, which assumes the perfect competition, the constant returns to scale, and the full use of input factor has been modified particularly in Hall's(1990) and Basu's(1996) works. Their researches take account of market power, returns to scale, and variable factor utilization. This paper establishes the empirical model based on Hall's(1990) and Basu's(1996) models, estimates 4 types of Solow's reidual in manufacturing and 2 service industries over the period 1975:1-2010:4, and analyzes the cyclicality of measured productivity. The result proved the measured productivity to be procyclical in manufacturing industries and electricity and water industry, and in contrast to the Basu's, the variable factor utilization transformed the countercyclicality of measured productivity into its procyclicality in the Korean economy.