In late 1997, Korea experienced a huge and unusual economic crisis. Three main features of this crisis are the sudden recession, the rapid recovery of output, and the consumption drop even greater than the output drop. There is a large body of literature which qualitatively explains the Korean crisis in terms of financial and monetary variables such as exchange rates, price levels and interest rates. This paper complements these studies by quantitatively analyzing the fluctuation of real macroeconomic variables such as real GDP and consumption within the neoclassical framework. A stochastic small open economy neoclassical model can quantitatively account for the Korean crisis taking productivity and real interest rates as exogenous.
Keywords: Korean Crisis; Neoclassical Model; Small Open Economy; Total Factor Productivity; Financial Crisis
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.