• Economic Analysis
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• v.25 no.2
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• pp.132-176
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• 2019

We use a time-varying parameter vector auto regression (TVP-VAR) model to understand the impact of U.S. monetary policy normalization on Korean financial markets and capital accounts. The U.S. monetary policy is represented by the federal funds rate, term premium and credit spread. During the U.S. monetary contraction period of 2004 to 2006, changes in the federal funds rate presented negative pressure on Korean financial markets. The changes in federal funds rate also led to a simultaneous contraction in inward and outward capital flows. However, the effects of a federal funds rate shock has been reduced since 2015. On the other hand, the effects of U.S. term premiums is getting stronger after the period of quantitative easing (QE). The influence of the U.S. credit spread also significantly increased after the global financial crisis. Simulation results show that a rise in the U.S. credit spread, which can be triggered by a contractionary monetary policy, can pose a larger adverse impact on the Korean economy than a rise in the federal funds rate itself. As for capital flows, a U.S. monetary policy contraction causes an outflow of foreign investment, but the repatriation of overseas investment by Korean residents can offset this outflow.

• KDI Journal of Economic Policy
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• v.36 no.3
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• pp.1-23
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• 2014

This paper has studied the monetary policy in Korea with a time varying VAR model using four key macroeconomic variables. First, inclusion of the exchange rate was a crucial factor in evaluating Korean monetary policy since the monetary policy demonstrated sensitivity to exchange rate movements during the crisis periods of both the Asian financial crisis of 1997 and the global financial crisis of 2008. Second, a specification of the stochastic volatilities in TVP-VAR model is important in explaining excessive movements of all variables in the sample. The overall moderation of variables in 2000s was more or less due to a reduction of the stochastic volatilities but also somewhat due to the macroeconomic fundamental structures captured by impulse response functons. Third, the degree of the monetary policy effectiveness of inflation was mitigated in recent periods but with increased persistence. Lastly, the monetary policy stance towards inflation stabilization has advanced ever since the inflation targeting scheme was adopted. However, there still seems to be a room for improvement in this aspect since the degree of the monetary policy stance towards inflation stabilization was relatively weaker than to output stabilization.

• East Asian Economic Review
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• v.25 no.1
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• pp.73-97
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• 2021

China has experienced many structural changes in the process of economic development over the past three decades. Using a time-varying parameter VAR model with stochastic volatility and mixture innovations, this study investigates whether such structural changes in, especially tools and operational aims of monetary policy, affect the monetary transmission mechanism. We find that impulse responses of output growth and inflation to monetary shocks have substantially increased and then reversed to decrease around 2005-2006. This time variation is mainly caused by changes in the monetary transmission mechanism, i.e., the manner in which main macroeconomic variables respond to policy shocks, rather than by changes in volatilities of exogenous shocks. The result implies that aggressive monetary policy to facilitate economic growth in the developing economies may be legitimized, unless it causes inflation seriously.

• East Asian Economic Review
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• v.28 no.1
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• pp.95-140
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• 2024

This study empirically investigates the international transmission of China's uncertainty shocks. It estimates a time-varying parameter Bayesian global structural vector autoregressive model (TVP-BGVAR) using time series data for 33 countries to evaluate heterogeneous international linkage across countries and time. Uncertainty shocks are identified via sign restrictions. The empirical results reveal that an increase in uncertainty in China negatively affects the global economy, but those effects significantly vary over time. The effects of China's uncertainty shocks on the global economy have been significantly altered by China's WTO accession, the global financial crisis, and the recent US-China trade conflict. Furthermore, the effects of China's uncertainty shocks, typically on inflation, differ significantly across countries. Moreover, Trade openness appears crucial in explaining heterogeneous GDP responses across countries, whereas the international dimension of monetary policy appears to be important in explaining heterogeneous inflation responses across countries.

• Environmental and Resource Economics Review
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• v.27 no.3
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• pp.495-520
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• 2018

Because of structural changes in the international oil market and the economy, it is widely recognized that the impact of oil shocks on the economy has weaken since the mid-1980s. This study tries to examine the validity of the recent perception about the relationship between oils shocks and the economy, estimating the time-varying effects of oil shocks on the Korean economy. The results show that the dynamic effects of oil shocks normalized to a one standard deviation has been relatively constant, in contrast to the recent perception and a number of existing studies. In addition, because the shape of impulse response functions at each point in time spanning from 1984:II to 2017:IV has not been changed significantly, it seems that the propagation mechanism of oil shocks also has not been substantially altered. These findings indicate that even though structural changes of the economy, such as the reduction in the share of oil consumption and the spread of high-efficiency energy technologies, have been rapidly progressed, it is not still enough to offset the negative effects of oil shocks. Rather, it seems that the recent perception about the shrinking effects of oil shocks is mainly due to the assumptions that do not reflect changes in the size of oil shocks. In particular, this problem appears more pronounced in the case of the typical a one standard deviation increase oil shock under homoskedasticity assumption, which is widely adopted in the most VAR analyses. Therefore, in estimating the effects of oil shocks on the economy, it is important to specify the correct model and normalization method, to reflect changes in the size of oil shocks.

• Journal of Korea Trade
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• v.24 no.4
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• pp.1-17
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• 2020

Purpose - Since China has been South Korea's biggest export destination, uncertainty shocks originating from it would influence South Korea's exports. This paper evaluates the effects of China's economic policy uncertainty on Korea's exports to explore the transmission channels. Design/methodology - Incorporating endogeneities and nonlinearities, this study employs a quarterly time-varying parameters vector autoregressive model to investigate the relationships between China's economic policy uncertainty and Korea's exports, where the overparameterization due to time-varying specifications is overcome by a novel stochastic model specification search framework. According to previous theoretical studies, this paper assesses two channels, demand shock channel and exchange rate channel, through which foreign uncertainty affects Korea's exports. This paper identifies the primary drivers of Korea's aggregate exports and analyzes the rationales for the time-variant impacts of China's economic policy uncertainty on Korea's exports to China. Findings - Our empirical results reveal that Korea's aggregate exports are less responsive to China's economic policy uncertainty shocks and significantly move together with global demand. In contrast, its bilateral exports to China are highly responsive in a negative and time-variant way. Moreover, Chinese investment is an important channel through which China's economic policy uncertainty affects Korea's exports to China after 2010. Further, the time-variant effects of China's economic policy uncertainty on Korea's exports to China are related to changes in China's foreign trade policies, global economic conditions, and China's degree of economic freedom. Originality/value - Few previous studies touch the effects of external uncertainty shocks on South Korea's exports. This paper attempts to fill this gap and explicitly investigate the impacts of China's economic policy uncertainty on Korea's exports from a time-varying perspective. As Korea is an export-oriented economy, this study provides insights for the Korean government to understand the transmissions of external uncertainty better.