Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 16, No. 2, pp.215-246
ISSN: 1225-0279 (Print)
Print publication date 31 May 2003
Received 29 Oct 2003 Revised 21 Dec 2003

Impact of the 1997 Crisis on Korea's Growth Trend: Unobserved Component Model Based Analysis

Chan-Guk Huh ; Won-Am Park
Senior Research Fellow and the Director of Center for Macroeconomic Studies, Korea Economic Research Institute, FKI Building 12 Fl. 28-1, Yoido-dong, Ueongdungpo-ku, Seoul 150-756, Korea, Tel: +82-2-3771-0013 chan_huh@keri.org
Professor, College of Business Administration Hongik University, 72-1 Sangsu-dong, Mapo-ku, Seoul, Korea, Tel: +82-2-320-1713 wapark@hongik.ac.kr

JEL Classification: E23

Abstract

We offer a systematic examination of the extent of permanence of the adverse influence of the 1997 crisis and its aftermath on Koreas potential GDP trend by employing unobserved component models that decompose observed output into a stochastic trend and a stationary cycle. We consider models that allow a nonzero covariance between trend and cycle innovations. Results from several unobserved component models indicate that long-term trend growth rate has shifted downward in the post-1997 crisis period as the event seemed to have left some permanent adverse impact. At the same time, output gaps measured using output-Phillips curve models have remain negative in the same period. Results seem to suggest that it is premature to make such pronouncements that the Korea economy has now entered an era of low growth, say, an annual growth rate in the 4% range.

Keywords:

Potential output, Output gap, Korean economy, 1997 crisis

Acknowledgments

An earlier draft was presented at the 11th Seoul Journal of Economics International Symposium, “The Post-Crisis Macroeconomic Adjustment in East Asia” organized by the Institute of Economic Research, Seoul National University on October 29, 2003. We would like to thank Chang-Jin Kim and other conference participants for their helpful comments, and Min-Jin Cho for capable research assistance. Any remaining errors are our own. This work was supported by 2003 Hongik University Research Fund.

References

  • Beveridge, S., and Nelson, C. R. “A New Approach to Decomposition of Economic Time Series in Permanent and Transitory Components with Particular Attention to Measurement of the Business Cycle.” Journal of Monetary Economics 7 (1981): 151-174. [https://doi.org/10.1016/0304-3932(81)90040-4]
  • Clark, P. K., “Potential GNP in the United States, 1948-80.” The Review of Income and Wealth 25 (1979): 141-166. [https://doi.org/10.1111/j.1475-4991.1979.tb00091.x]
  • Clark, P. K., “Trend Reversion in Real Output and Unemployment.” Journal of Econometrics 40 (1989): 15-32. [https://doi.org/10.1016/0304-4076(89)90027-4]
  • Cerra, V., and Saxena, Sweta Chaman. Did Output Recover from the Asian Crisis? IMF Working Paper 03-48, IMF, 2003. [https://doi.org/10.5089/9781451846751.001]
  • Chang, Dong Ku. “Estimation of Potential GNP in Korea.” Economic Analysis 2 (No. 1 1996): 29-68.
  • Chang, Dong Ku. “A Consideration of Potential GDP Estimation and the Utility of the Output Gap As an Indicator of Inflation.” Economic Analysis 3 (No. 4 1997): 123-50.
  • Choi, Gongpil, “Estimating Potential Output in a Semi-Open Economy.” Journal of Korean Economic Analysis 2 (June 1996): 65-95.
  • Gerlach, A., and Smets, Frank. “Output Gaps and Monetary Policy in the EMU Area.” European Economic Review 43 (1999): 801-12. [https://doi.org/10.1016/S0014-2921(98)00095-6]
  • Gerlach, A., and Yiu, M. S. Unobservable-Component Estimates of Output Gaps in Five Asian Economies. Mimeograph. Hong Kong Institute for Monetary Research, 2002. [https://doi.org/10.2139/ssrn.1009132]
  • Gordon, R. “Unemployment and Potential Output in the 1980s.” Brookings Papers on Economic Activity 2 (1984): 537-64. [https://doi.org/10.2307/2534438]
  • Hahn, C., Choi K., Kim D., and Lim K. The Potential Growth Rate of the Korea Economy: 2003-2012. Policy Paper 2002-07, Korea Development Institute, 2003.
  • Harvey, A. C. Time Series Models. Oxford: Philip Allen, 1985.
  • Hodrick R. D., and Prescott, E. C. “Post-War U.S. Business Cycle: An Empirical Investigation.” Journal of Money, Credit, and Banking 29 (1997): 1-16. [https://doi.org/10.2307/2953682]
  • Kim, Byeong Hwa, and Kim, Yoon Cheol. “Estimation of Potential GDP in Korea.” Monthly Bulletin (February 1992): 20-50.
  • Kim, Chi Ho, and So-Sang, Moon. Potential GDP and Inflation in Korea, The Bank of Korea, Monetary and Economic Research Institute, Economic Analysis 6, pp. 1-32, March 2000.
  • King, R. G., and Rebelo, S. T. “Low Frequency Filtering and Real Business Cycles.” Journal of Economic Dynamics and Control 17 (1993): 207-31. [https://doi.org/10.1016/S0165-1889(06)80010-2]
  • Kuttner, K. N. “Estimating Potential Output As a Latent Variable.” Journal of Business and Economic Statistics 12 (1994): 361-7. [https://doi.org/10.2307/1392092]
  • Laxton, D., Isard, P., and Eliasson, A. Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility. Paper Presented at the Reserve Bank of New Zealand Workshop on Monetary Policy under Uncertainty, 29-30 June 1998.
  • Lee, Byeong Wan. “Estimation of Korean Potential GNP Using Filtering Approach.” Journal of Korean Economic Analysis 2 (June 1996): 1-56.
  • Moley, J. C., Nelson, C. R., and Zivot, E. “Why Are the Beveridge- Nelson and Unobserved-Components Decompositions of GDP So Different?” The Review of Economics and Statistics 85 (2003): 235-43. [https://doi.org/10.1162/003465303765299765]
  • OECD. “Estimating Potential Output, Output Gaps and Structural Budget Balances.” Economic Outlook 56 (1994): 31-7.
  • Okun, A. M. “Potential GNP: Its Measurement an Significance.” American Statistical Association Proceeding (1962): 145-58.
  • Perlof, J. M., and Wachter, M. L. “A Production Function Nonaccelerating Inflation Approach to Potential Output: Is Measured Potential Output too High?” Carnegie Rochester Conference Series on Public Policy 1 (1979): 19-46. [https://doi.org/10.1016/0167-2231(79)90007-1]
  • Perry, G. L. “Potential Output: Recent Issues and Present Trends.” In U.S. Productive Capacity: Estimating the Utilization Gap, Working Paper 23, Washington University, 1977. [https://doi.org/10.20955/r.59.1-20.geg]
  • Proietti, T., Some Reflections on Trend-Cycle Decompositions with Correlated Components. Mimeograph, Department of Economics, European University Institute, 2002.
  • Pyo, Hak-Kil. “Economic Growth in Korea: A Long-Run Growth Accounting (1911-1999).” Journal of Korean Economic Analysis 6 (August 2000): 1-52.
  • St-Amant, P., and Norden, Simon van. “Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada” BIS (1997): 1-38.
  • Watson, M. W. “Univariate Dtrending Methods with Stochastic Trends.” Journal of Monetary Economics 18 (1986): 49-75. [https://doi.org/10.1016/0304-3932(86)90054-1]