Business Cycles in Korea: Insights from a TANK Model

This paper sets up a medium-scale small open economy TANK model with incomplete markets to address business cycles in Korea extensively. The estimated model via Bayesian estimation methodology shows that the fraction of households who lack access to financial markets increased from 30 percent to 40 percent after the Asian Financial Crisis. This feature appears to be associated with structural changes in employment practices, including life-time employment and seniority-based salaries, as well as an increase in part-time jobs after the crisis. Since the mid-1970s, domestic markup, government spending, and risk premium shocks have been key factors influencing business cycles in Korea.