Understanding macroeconomic volatility in South Korea: a heterogeneous-agent New Keynesian model with sticky prices framework

This study employs a Heterogeneous Agent New Keynesian (HANK) model to analyze the impact of price stickiness on macroeconomic dynamics, policy responses, and distributional effects in South Korea. Using Impulse Response Functions (IRFs), it estimates the responses of output, real interest rates, and household consumption to monetary policy shocks and variations in the price stickiness parameter over an extended period. Our findings reveal that higher price stickiness amplifies initial deviations in economic variables and slows their return to equilibrium, while reduced stickiness leads to quicker convergence. Additionally, we explore the influence of price stickiness on household income and labor supply decomposition and compare the results to a Representative Agent New Keynesian (RANK) model. Finally, the study assesses the role of borrowing constraints in the HANK model, concluding that relaxing such constraints can lead to a more equitable distribution of assets and an increase in aggregate spending.