Hostname: page-component-848d4c4894-sjtt6 Total loading time: 0 Render date: 2024-06-25T08:09:14.891Z Has data issue: false hasContentIssue false
  • English
  • Français

CAN RBC MODELS EXPLAIN BUSINESS CYCLES IN KOREA?

Published online by Cambridge University Press:  26 April 2016

Wooheon Rhee
Wooheon Rhee*
Affiliation:
Kyung Hee University
*
Address correspondence to: Wooheon Rhee, Department of Economics, Kyung Hee University, 25 Kyungheedae-ro, Dongdaemun-gu, Seoul 130-701, Korea; e-mail: wrhee@khu.ac.kr.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

I examine whether an RBC model can generate a higher volatility of consumption relative to output, a strong negative correlation between output and the trade balance, and a weak countercyclicality of the real interest rate, phenomena that have been observed in the business cycles of emerging economies, including Korea. From an RBC model with recursive utility, I show that it is not the degree of relative risk aversion, but the elasticity of intertemporal substitution (EIS), that governs the movements of the variables of the model in the log linearized environment. The Bayesian estimation results based on Korean data from the period 1987 to 2013 suggest that there are some elements of success in describing the Korean economy based on the simple RBC model both with the EIS larger than one and with an error term for the real interest rate equation. An EIS larger than one improves the performance of the simple RBC model mainly in the direction of raising the volatility of consumption relative to output. Simulation results show that the error term for the real interest rate process mostly reflects the endogenous channel of financial frictions where the domestic real interest rate depends negatively on the expected (transitory) productivity shock.

Keywords

RBC ModelEmerging-Economy Business CyclesKorean EconomyRecursive UtilityElasticity of Intertemporal Substitution
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 3 , April 2017 , pp. 599 - 623
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

I benefited from helpful comments by two anonymous referees, Sungbae An, Hong-Ki Bahng, Yongsung Chang, Yongseung Jung, Jinill Kim, Siwon Ryu, Myung-Soo Yi, Tack Yun, and seminar participants at the 2012 JSIE meeting. Any errors are mine.

References

REFERENCES

Aguiar, Mark and Gopinath, Gita (2007) Emerging market business cycles: The cycle is the trend. Journal of Political Economy 115, 69–102.CrossRefGoogle Scholar
An, Sungbae and Li, Nan (2013) Measuring Intangible Capital with Uncertainty. Unpublished manuscript, Singapore Management University.Google Scholar
Bahng, Hong K. (2012) Accounting for Business Cycle Regularities in Emerging Economies. Unpublished thesis (Ph.D.). University of Rochester.Google Scholar
Bansal, Ravi and Yaron, Amir (2004) Risks for the long run: A potential resolution of asset pricing puzzles. Journal of Finance 59 (4), 1481–1509.CrossRefGoogle Scholar
Binsbergen, Jules H., Fernandez-Villaverde, Jesus, Koijen, Ralph S.J., and Rubio-Ramirez, Juan F. (2012) The term structure of interest rates in a DSGE model with recursive preference. Journal of Monetary Economics 59, 634–648.CrossRefGoogle Scholar
Boissay, Frederic, Collard, Fabrice, and Smets, Frank (2013) Booms and Banking Crises. ECB WP 1514.Google Scholar
Boz, Emine, Durdu, C. Bora, and Li, Nan (2012) Emerging Market Business Cycles: The Role of Labor Market Frictions. IMF WP 12237.CrossRefGoogle Scholar
Chang, Roberto and Fernandez, Andres (2013) On the sources of aggregate fluctuations in emerging economies. International Economic Review 54, 1265–1293.CrossRefGoogle Scholar
Chen, Xiaohong, Favilukis, Jack, and Ludvigson, Sydney C. (2013) An estimation of economic models with recursive preferences. Quantitative Economics 4, 39–83.CrossRefGoogle Scholar
Coeurdacier, Nicolas, Rey, Helene, and Winant, Pablo (2011) The risky steady state. American Economic Review 101, 398–401.CrossRefGoogle Scholar
de Groot, Oliber (2014) The risk channel of monetary policy. International Journal of Central Banking 10, 115–160.Google Scholar
Dew-Becker, Ian (2012) A Model of Time-Varying Risk Premia with Habits and Production. Job Market Paper, Harvard University.Google Scholar
Dew-Becker, Ian (2014) Bond pricing with a time-varying price of risk in an estimated medium-scale Bayesian DSGE model. Journal of Money, Credit and Banking 46, 837–888.CrossRefGoogle Scholar
Epstein, Larry G. and Zin, Stanley E. (1991) Substitution, risk aversion, and the temporal behavior of consumption and asset returns: An empirical analysis. Journal of Political Economy 99 (2), 263–286.CrossRefGoogle Scholar
Faia, Ester and Monacelli, Tommaso (2007) Optimal interest rate rules, asset prices, and credit frictions. Journal of Business and Economic Studies 31, 3228–3254.Google Scholar
Garcia-Cicco, Javier, Pancrazi, Roberto, and Uribe, Martin (2010) Real business cycles in emerging countries. American Economic Review 100, 2510–2531.CrossRefGoogle Scholar
Greenwood, J., Hercowitz, Z., and Huffman, G.W. (1988) Investment capacity utilization, and the real business cycle. American Economic Review 78, 402–417.Google Scholar
Griffoli, Tommaso Mancini (2007–2008) Dynare User Guide: An Introduction to the Solution & Estimation of DSGE Models. www.dynare.org.Google Scholar
King, Robert, Plosser, Charles, Stock, James, and Watson, Mark (1991) Stochastic trends and economic fluctuations. American Economic Review 81, 819–840.Google Scholar
Neumeyer, Pablo A. and Perri, Fabrizio (2005) Business cycles in emerging economies: The role of interest rates. Journal of Monetary Economics 52, 345–380.CrossRefGoogle Scholar
Otsu, Keisuke (2008) A neoclassical analysis of the Korean crisis. Review of Economic Dynamics 11, 449–471.CrossRefGoogle Scholar
Piazzesi, Monika and Schneider, Martin (2006) Equilibrium yield curves. NBER Macroeconomics Annual, 389–442.CrossRefGoogle Scholar
Tallarini, Thomas D. (2000) Risk-sensitive real business cycles. Journal of Monetary Economics 45, 507–532.CrossRefGoogle Scholar
Uribe, Martin and Yue, Vivian Z. (2006) Country spreads and emerging countries: Who drives whom? Journal of International Economics 69, 6–36.CrossRefGoogle Scholar
Weil, Philip (1989) The equity premium puzzle and the risk-free rate puzzle. Journal of Monetary Economics 24, 401–421.CrossRefGoogle Scholar