Kim, Kyunghun
A icle
The D i e s o In la ion in Ko ea: Insigh s om a Small
Open DSGE Model
Eas Asian Economic Re iew (EAER)
P o ided in Coope a ion wi h:
Ko ea Ins i u e o In e na ional Economic Policy (KIEP), Sejong-si
Sugges ed Ci a ion: Kim, Kyunghun (2025) : The D i e s o In la ion in Ko ea: Insigh s om a Small
Open DSGE Model, Eas Asian Economic Re iew (EAER), ISSN 2508-1667, Ko ea Ins i u e o
In e na ional Economic Policy (KIEP), Sejong-si, Vol. 29, Iss. 1, pp. 41-76,
h ps://doi.o g/10.11644/KIEP.EAER.2025.29.1.444
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Eas Asian Economic Re iew ol. 29, no. 1 (Ma ch 2025) 41-76
h ps://dx.doi.o g/10.11644/KIEP.EAER.2025.29.1.444
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
The D i e s o In la ion in Ko ea:
Insigh s om a Small Open DSGE Model*
Kyunghun Kim†
Hongik Uni e si y
[email p o ec ed]
1
This s udy analyzes he d i e s o in la ion in Sou h Ko ea using a Dynamic S ochas ic
Gene al Equilib ium (DSGE) model ailo ed o he cha ac e is ics o Ko ea as a small
open economy. Employing qua e ly da a om 1999Q2 o 2023Q2, Bayesian es ima ion is
used o es ima e Ko ea-speci ic pa ame e s. Based on he es ima ed pa ame e s,
impulse esponse analysis and his o ical decomposi ion a e conduc ed. The esul s
indica e ha cos -push shocks ied o impo ed goods p icing ha e been he p ima y
d i e o ecen in la ion su ges in Ko ea. Acco dingly, policymake s need o adop a
comp ehensi e app oach—including no only mone a y policy bu also mac op uden ial
measu es and aw ma e ial supply managemen — o mi iga e supply-side in la iona y
p essu es e ec i ely.
Keywo ds: In la ion, Dynamic S ochas ic Gene al Equilib ium, Bayesian Es ima ion,
Cos -push Shocks
JEL Classi ica ion: E31, E32, C11, F41
I. In oduc ion
The annual g ow h a es o Ko ea’s Co e Consume P ice Index (CPI) exceeded
3.6% and 3.4% in 2022 and 2023, espec i ely. Al hough he index declined o 2.2%
in 2024, hese ele a ed in la ion a es ep esen unp eceden ed le els in he pas
* This wo k was suppo ed by he Minis y o Educa ion o he Republic o Ko ea and he Na ional
Resea ch Founda ion o Ko ea (NRF-2022S1A5A8052515). I would like o hank h ee anonymous
e e ees o hei insigh ul commen s.
† Associa e P o esso , School o Economics, Hongik Uni e si y, 94 Wausan- o, Mapo-gu, Seoul
04066 Republic o Ko ea. Tel: +82-2-320-1809.
ID
42 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
decade.
1
His o ically, such high in la ion a es we e obse ed in he ea ly 2000s (2001–
2003) and du ing he global inancial c isis in 2008, when in la ion exceeded 3% (Figu e
1).
Figu e 1. Co e Consume P ice Index(CPI) in Ko ea: Yea 2000~2024
No e: Co e Consume P ice Index(CPI) ep esen s a measu e o in la ion ha excludes ola ile p ices like
ood and ene gy om he CPI.
Sou ce: Bank o Ko ea Economic S a is ics Sys em
This s udy iden i ies he majo shocks ha ha e in luenced in la ion dynamics in
Ko ea since he 2000s. I also in es iga es he key d i e s behind he ecen su ge in
in la ion, p o iding a deepe unde s anding o he ac o s con ibu ing o he sha p p ice
inc eases obse ed in ecen yea s. Finally, he s udy explo es policy implica ions o
managing in e es a e policy e ec i ely o achie e p ice s abili y in he con ex o
Ko ea’s unique economic cha ac e is ics.
This s udy employs he Dynamic S ochas ic Gene al Equilib ium (DSGE) model by
Jus iniano and P es on (2010), which inco po a es he cha ac e is ics o Ko ea as a small
open economy. Jus iniano and P es on (2010) build on he amewo k o Galí and
Monacelli (2005), which assumes impe ec compe i ion and p ice igidi ies, by
1
Global supply chain bo lenecks and heigh ened ene gy p ice ola ili y ha e been iden i ied as common
ac o s d i ing global in la ion (In e na ional Mone a y Fund, 2021). Simila ly, Sou h Ko ea has
expe ienced a signi ican ise in consume p ices, wi h in la ion a es exceeding 3% since Oc obe
2021 (Oh e al., 2022).
0
0.5
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3.5
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0
20
40
60
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120
2000
2001
2002
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Co e CPI (le , index) G ow h( igh , %)
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 43
ⓒ 2025 Eas Asian Economic Re iew
in oducing addi ional ea u es such as an incomple e asse ma ke , habi o ma ion, and
p ice indexa ion o pas in la ion. Fo he analysis, he s udy u ilizes calib a ion and
Bayesian es ima ion o es ima e Ko ea-speci ic pa ame e s. Based on hese es ima ed
pa ame e s, he s udy ocuses on in la ion, he p ima y a iable o in e es , o conduc an
in-dep h analysis.
The a iables used o pa ame e es ima ion include Ko ea’s indus ial p oduc ion,
policy in e es a e, eal e ec i e exchange a e, e ms o ade, and co e consume p ice
index (excluding ood and ene gy), as well as he G-7 coun ies’ indus ial p oduc ion,
co e consume p ice index (excluding ood and ene gy), and a e age policy in e es a e.
Qua e ly da a we e u ilized, co e ing he pe iod om 1999Q2 o 2023Q2, which
co esponds o he pos -IMF c isis e a when Ko ea adop ed in la ion a ge ing and
ansi ioned o a loa ing exchange a e egime.
Based on he analysis o he es ima ed pa ame e s, du ing pe iods o ising p ices in
he p e-COVID e a—when o e all in la ion was ela i ely s able—bo h mone a y policy
shocks and echnology shocks played a signi ican ole in d i ing in la ion in Ko ea.
Howe e , in he wo yea s ollowing 2021, when in la ion accele a ed sha ply,
echnology shocks con inued o con ibu e subs an ially, while cos -push shocks eme ged
as a majo in luence on p ice inc eases. This con as s wi h he p e-COVID pe iod,
du ing which cos -push shocks la gely helped s abilize in la ion; mo e ecen ly, howe e ,
hey appea o ha e p opelled in la ion upwa d. These indings indica e ha e ec i ely
managing supply-side p essu es—such as aw ma e ial cos s and domes ic dis ibu ion
ma gins—along wi h os e ing p oduc i i y g ow h, is cen al o main aining p ice s abili y.
While many s udies ha e u ilized DSGE models o analyze Ko ea’s business cycles
o op imal mone a y policy (conside ing in la ion a ge ing), ew ha e ocused speci ically
on in la ion dynamics and he heo e ical ansmission channels, as p oposed in his s udy.
Analyzing in la ion dynamics using a small open economy DSGE model o e s he
ad an age o iden i ying no only domes ic ac o s bu also ex e nal ac o s, such as
ising impo p ices, o eign in e es a e shocks, o o eign ou pu luc ua ions, ha
con ibu e o in la ion. This app oach is pa icula ly signi ican o unde s anding
in la ion in a highly ade-dependen , small open economy like Ko ea and ep esen s a
aluable con ibu ion o he exis ing li e a u e.
The emainde o his pape is o ganized as ollows: Sec ion II e iews he exis ing
li e a u e ela ed o his s udy. Sec ion III desc ibes he model, while Sec ion IV p esen s
he Bayesian es ima ion esul s. Sec ion V discusses he indings o he analysis, and
Sec ion VI concludes he pape .
44 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
II. Li e a u e Re iew
The e is ex ensi e exis ing esea ch on exchange a e pass- h ough in Ko ea. Cha
(2007) analyzed he ac o s d i ing he inc ease in Ko ea's exchange a e pass- h ough
and i s impac on domes ic in la ion. Co e ing he pe iod om 1980 o 2005, he s udy
examined exchange a e pass- h ough by di e en exchange a e egimes. The indings
indica ed ha bo h sho - and long- e m exchange a e pass- h ough o impo p ices
ha e been inc easing, no due o changes in ade composi ion bu a he due o ising
pass- h ough a es a he indus y le el.
Zhu e al. (2010) used a s uc u al VAR model (including a iables such as oil p ices,
p oduc ion, exchange a es, money supply, impo p ices, and consume p ices) o
analyze he pass- h ough e ec s o won/dolla exchange a e changes. Acco ding o hei
s udy, he pass- h ough e ec s o exchange a e changes on impo p ices and consume
p ices we e e y small and showed a declining end o e ime. They a gued ha
policymake s should p io i ize managing in la ion o e ocusing on exchange a es.
Choi (2013) es ima ed he exchange a e pass- h ough o Ko ea’s manu ac u ing
sec o in esponse o changes in he won/dolla exchange a e. Using annual da a om
1999 o 2011, a panel analysis was conduc ed on 30 manu ac u ing indus ies. The
esul s showed ha a 10% inc ease in he won/dolla exchange a e led o a 2.4% o 4.9%
dec ease in dolla -denomina ed expo p ices ac oss all indus ies. The pass- h ough
e ec was pa icula ly high in basic ma e ials indus ies, while indus ies ela ed o
consume goods—such as ood, ex iles and appa el, lea he p oduc s, and miscellaneous
manu ac u ed goods—showed minimal esponsi eness.
Pa k and Cha (2014) analyzed he ela ionship be ween exchange a e pass- h ough o
consume p ices and mone a y policy using panel da a om 11 eme ging economies ha
had adop ed in la ion a ge ing policies. Thei indings indica ed ha bo h he le el and
ola ili y o in la ion dec eased ollowing he adop ion o in la ion a ge ing. They a gued
ha his educ ion in exchange a e pass- h ough was a ibu able o mone a y au ho i ies
e ec i ely managing in la ion expec a ions unde he in la ion a ge ing amewo k.
Lee (2017) es ima ed he exchange a e pass- h ough o domes ic p ice le els using a
ime- a ying pa ame e model wi h qua e ly da a. The analysis e ealed a gene al
declining end in exchange a e pass- h ough since he 2000s. The s udy ound ha
exchange a e ola ili y and in la ion posi i ely a ec ed exchange a e pass- h ough,
while ade dependency, in la ion ola ili y, and p oduc ion ola ili y had nega i e e ec s.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 45
ⓒ 2025 Eas Asian Economic Re iew
Chiang (2021) analyzed he asymme y and nonlinea i y o exchange a e pass- h ough
o impo p ices ac oss Ko ean indus ies. Using he p icing- o-exchange a e model
p oposed by Goldbe g and Kne e (1997), he analysis demons a ed ha he pass- h ough
e ec was g ea e du ing cu ency app ecia ions han dep ecia ions, showing signi ican
asymme y. This e ec became mo e p onounced a e he o eign exchange c isis.
Recen s udies on DSGE models include Choi (2019), Rhee e al. (2020), Kim e al.
(2021), and Hu and Oh (2024). Choi (2019) de eloped a small open economy DSGE
model o analyze Ko ea’s business cycles and op imal mone a y policy. Using Bayesian
me hods o es ima e pa ame e s, he s udy demons a ed ha a posi i e echnology shock
leads o an inc ease in ou pu , a decline in p ices, and an app ecia ion o he exchange
a e. In con as , a posi i e o eign income shock causes inc eases in bo h p oduc ion and
p ices. The analysis concluded ha he op imal mone a y policy ule is one ha p ima ily
esponds o domes ic in la ion.
Rhee e al. (2020) de eloped a small open economy DSGE model o analyze Ko ea’s
business cycles and assess he o ecas ing pe o mance o mac oeconomic a iables.
Simila o Choi (2019), hey es ima ed he model pa ame e s using Bayesian me hods
and employed a DSGE-VAR app oach. The analysis e ealed ha , compa ed o
mone a y o supply shocks, demand and echnology shocks ha e a mo e signi ican
impac on key economic a iables. This e ec was pa icula ly p onounced o g ow h
a es and in la ion.
Kim e al. (2021) analyzed he impac o he Fede al Rese e’s mone a y policy
no maliza ion on Ko ea’s ex e nal sec o , including exchange a es, capi al lows, and
swap basis sp eads. They conduc ed scena io analyses ocusing on he e ec s o he
Fede al Rese e’s ape ing and in e es a e hikes. No ably, hei s udy sha es simila i ies
wi h he cu en s udy in u ilizing he model by Jus iniano and P es on (2010) o assess
he e ec s o mone a y policy no maliza ion on Ko ea’s exchange a e. The analysis
showed ha unde a pessimis ic scena io, he exchange a e could inc ease by up o 22%,
and GDP could ini ially decline by 2.1% be o e eco e ing.
Hu and Oh (2024) employ a DSGE model o examine how he Bank o Ko ea has
conduc ed mone a y policy since he 2000s, showing ha i has pa ially esponded o
inancial s abili y ac o s, such as household c edi , as well as in la ion and g ow h.
Focusing on he pe spec i e o op imizing a cen al bank’s loss unc ion, hey
demons a e ha inco po a ing household deb a iables in o he in e es a e ule leads
o mo e e ec i e medium- o long- e m economic s abiliza ion. Consequen ly, hei
46 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
indings sugges ha an In eg a ed In la ion Ta ge ing amewo k could se e as a
po en ial al e na i e o Ko ea’s mone a y policy sys em.
P e ious s udies closely ela ed o his esea ch include Choi (2019), Rhee e al. (2020),
Kim e al. (2021), and Hu and Oh (2024). Like hese s udies, he cu en esea ch is
based on a DSGE model bu ocuses on iden i ying he heo e ical mechanisms h ough
which in e nal and ex e nal ac o s in luence in la ion dynamics. No ably, i dis inguishes
i sel om p io esea ch by analyzing he causes o Ko ea’s ecen in la ion su ge
ollowing he COVID-19 pandemic using he DSGE amewo k.
III. Model
In Chap e III, he DSGE model is b ie ly desc ibed. The model is based on Jus iniano
and P es on (2010), which builds upon Galí and Monacelli (2005) by in oducing
assump ions o impe ec compe i ion and p ice igidi ies, along wi h addi ional ea u es
such as an incomple e asse ma ke , habi o ma ion, and p ice indexa ion o pas in la ion.
Fo a concise explana ion o he model, he economy is di ided in o h ee agen s:
households, p oduce s, and e aile s (who se p ices). The op imal decision-making
p ocess o each agen is de i ed, and he equilib ium, whe e all ma ke s clea , is de ined.
1. Households
Households a e assumed o make decisions ha maximize hei li e ime expec ed
u ili y.
𝐸∑𝛽
𝜀,
−
(1)
Household consump ion 𝐶 ep esen s he consump ion o inal goods, in luenced by
habi o ma ion ℎ𝐶, which e lec s ine ia in pas consump ion beha io . Bo h 𝐶
and ℎ𝐶 a ec household u ili y. 𝑁 deno es labo supply, 𝛽 is he discoun ac o
o u ili y, and 𝜎 is he coe icien o ela i e isk a e sion, whose ecip ocal ep esen s
he in e empo al elas ici y o subs i u ion. The ecip ocal o 𝜑 co esponds o he F isch
elas ici y o labo supply. 𝜀, ep esen s he p e e ence shock o households.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 47
ⓒ 2025 Eas Asian Economic Re iew
Consump ion 𝐶 is de ined as a inal good, which is a Dixi –S igli z agg ega o o
domes ically p oduced goods 𝐶, and goods p oduced ab oad 𝐶,. The pa ame e
𝛼 indica es he deg ee o ade openness, 𝜂 ep esen s he elas ici y o subs i u ion
be ween 𝐶, and 𝐶,, and 𝜀 deno es he elas ici y o subs i u ion among he indi idual
goods 𝑖 ha compose 𝐶, and 𝐶,.
𝐶=1−𝛼
𝐶,
+𝛼
𝐶,
(2)
whe e
𝐶,=𝐶,(𝑖)
𝑑𝑖
, 𝐶,=𝐶,(𝑖)
𝑑𝑖
The household’s budge cons ain is gi en by Equa ion (3).
𝑃𝐶+𝐷+𝑒𝐵=𝐷𝑖+𝑒𝐵𝑖
∗𝜙(𝐴)+𝑊𝑁+𝛱,+𝛱,+𝑇
(3)
𝐷 and 𝐵 ep esen households' holdings o domes ic and o eign bonds o one
pe iod, espec i ely, wi h he co esponding in e es a es deno ed by 𝑖 and 𝑖∗. 𝑒
ep esen s he nominal exchange a e, while 𝑃, 𝑃,, 𝑃,, and 𝑃∗ deno e, espec i ely,
he o e all domes ic p ice le el (o consume p ice index), he p ice o domes ically
p oduced goods, he domes ic cu ency-denomina ed p ice o impo ed o eign goods,
and he o eign cu ency-denomina ed p ice o o eign goods. 𝑊 deno es wages, and 𝑇
ep esen s lump-sum axes and ans e s. Π,and Π, a e he p o i s o domes ic goods
p oduce s and impo e s o o eign goods, espec i ely. I is assumed ha all households
ecei e equal sha es o p o i s. The e o e, he nominal income o each household
is 𝑊𝑁+Π,+Π,, which equals 𝑃,𝑌,+𝑃,−𝑒𝑃∗𝐶,.
When issuing o eign bonds o bo ow om ab oad, a isk p emium 𝜙(∙) is added o
he o eign nominal in e es a e.2 𝐴 ep esen s he a io o o eign bonds (denomina ed
in domes ic cu ency) o ou pu in s eady-s a e, and 𝜙 deno es he isk p emium shock.
2 Re e o Kollmann (2002), Schmi -G ohé and U ibe (2003), and Benigno (2009).
48 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
𝜙=𝑒𝑥𝑝−𝜉𝐴+𝜙 (4)
whe e
𝐴≡𝑒𝐵
𝑌
𝑃
The op imal expendi u e alloca ion condi ion o domes ic goods and o eign goods 𝑖,
which maximizes household u ili y, is as ollows.
𝐶,(𝑖)=,()
,𝐶,,𝑎𝑛𝑑 𝐶,(𝑖)=,()
,𝐶, (5)
Fu he mo e, he op imal expendi u e alloca ion condi ion o he composi e o
domes ic and o eign goods ha cons i u es he inal consump ion good is as ollows.
𝐶,=(1−𝛼),
𝐶,𝑎𝑛𝑑 𝐶,=𝛼,
𝐶 (6)
The o e all domes ic p ice le el (o consume p ice index) is de ined as: 𝑃=
(1−𝛼)𝑃,
+𝛼𝑃,
, whe e 𝑃,and 𝑃, ep esen he p ice indices o
domes ic goods (composi e) and o eign goods (composi e), espec i ely.
The op imal alloca ion o expendi u e on inal consump ion goods and labo supply
sa is ies Equa ions (7) and (8), espec i ely. 𝜆 ep esen s he Lag angian mul iplie ,
which e lec s he ma ginal u ili y o nominal income.
𝜆=𝜀,(𝐶−ℎ𝐶) (7)
𝜆=𝜀,
(8)
The alloca ion o domes ic and o eign bonds sa is ies he ollowing op imali y
condi ions.
Figu e 2. Time Se ies Da a Used o Pa ame e Es ima ion
a. Indus ial
p
oduc ion
b
. Polic
y
in e es a e
c. Real e ec i e exchange a e d. Te ms o ade
-20
-15
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0
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15
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40
60
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120
140
1999-05
2000-08
2001-11
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2005-08
2006-11
2008-02
2009-05
2010-08
2011-11
2013-02
2014-05
2015-08
2016-11
2018-02
2019-05
2020-08
2021-11
2023-02
0
0.01
0.02
0.03
0.04
0.05
0.06
0
1
2
3
4
5
6
1999-05
2000-08
2001-11
2003-02
2004-05
2005-08
2006-11
2008-02
2009-05
2010-08
2011-11
2013-02
2014-05
2015-08
2016-11
2018-02
2019-05
2020-08
2021-11
2023-02
0
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40
60
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120
140
0
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100
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140
1999-05
2000-09
2002-01
2003-05
2004-09
2006-01
2007-05
2008-09
2010-01
2011-05
2012-09
2014-01
2015-05
2016-09
2018-01
2019-05
2020-09
2022-01
2023-05
-20
-15
-10
-5
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50
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250
1999-05
2000-09
2002-01
2003-05
2004-09
2006-01
2007-05
2008-09
2010-01
2011-05
2012-09
2014-01
2015-05
2016-09
2018-01
2019-05
2020-09
2022-01
2023-05
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 55
ⓒ 2025 Eas Asian Economic Re iew
Figu e 2. Con inued
e. Consume p ice index . G-7 Indus ial
p
oduc ion
g
. G-7 Consume
p
ice index h. G-7 Polic
y
in e es a e
No e: The dashed lines ep esen he aw da a(le y-axis), while he solid lines ep esen he p ep ocessed da a( igh y-axis). Consume p ice indices
o Ko ea and he G-7 exclude ood and ene gy.
Sou ce: Au ho ’s calcula ion based on da a om he OECD, BIS, and he Bank o Ko ea Economic S a is ics Sys em.
-3
-2
-1
0
1
2
3
4
0
20
40
60
80
100
120
140
1999-05
2000-09
2002-01
2003-05
2004-09
2006-01
2007-05
2008-09
2010-01
2011-05
2012-09
2014-01
2015-05
2016-09
2018-01
2019-05
2020-09
2022-01
2023-05
-20
-15
-10
-5
0
5
10
0
20
40
60
80
100
120
1999-05
2000-09
2002-01
2003-05
2004-09
2006-01
2007-05
2008-09
2010-01
2011-05
2012-09
2014-01
2015-05
2016-09
2018-01
2019-05
2020-09
2022-01
2023-05
-3
-2
-1
0
1
2
3
4
0
20
40
60
80
100
120
140
1999-05
2000-09
2002-01
2003-05
2004-09
2006-01
2007-05
2008-09
2010-01
2011-05
2012-09
2014-01
2015-05
2016-09
2018-01
2019-05
2020-09
2022-01
2023-05
0
0.01
0.02
0.03
0.04
0.05
0.06
0
1
2
3
4
5
6
1999-05
2000-08
2001-11
2003-02
2004-05
2005-08
2006-11
2008-02
2009-05
2010-08
2011-11
2013-02
2014-05
2015-08
2016-11
2018-02
2019-05
2020-08
2021-11
2023-02
56 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
Table 1. P io and Pos e io Dis ibu ions o Pa ame e s
Pa ame e s and Desc ip ions P io Dis ibu ions Pos e io Dis ibu ions
Dis ibu ion Mean S.D. Mean S.D. 10% 90%
𝜎 In e se o In e empo al Elas ici y o Subs i u ion Gamma 1.2 0.4 1.78 0.25 1.41 2.20
𝜑 In e se o F isch Elas ici y o Labo Suppl
y
Gamma 1.5 0.75 1.66 0.41 1.06 2.28
𝜃 Domes ic Cal o Pa ame e
Be a 0.5 0.1 0.82 0.04 0.76 0.89
𝜃 Fo eign Cal o Pa ame e
Be a 0.5 0.1 0.95 0.001 0.95 0.95
𝜂 Elas ici y o Subs i u ion Be ween Domes ic and Fo eign Goods Gamma 1.5 0.75 0.83 0.01 0.82 0.83
ℎ habi o ma ion Be a 0.5 0.25 0.78 0.04 0.72 0.84
𝛿 Indexa ion o Domes ic Goods P ice In la ion Be a 0.5 0.25 0.60 0.20 0.19 0.86
𝛿 Indexa ion o Fo eign Goods P ice In la ion Be a 0.5 0.25 0.63 0.07 0.52 0.73
𝜓 Taylo Rule Smoo hing Pa ame e
Be a 0.5 0.25 0.98 0.01 0.97 1.00
𝜓 Taylo Rule In la ion Responsi eness Gamma 1.5 0.3 0.30 0.01 0.29 0.30
𝜓
Taylo Rule Ou pu Responsi eness Gamma 0.25 0.13 0.02 0.01 0.01 0.03
𝜓
Taylo Rule Ou pu G ow h Responsi eness Gamma 0.25 0.13 0.03 0.01 0.01 0.04
𝜓 Taylo Rule Exchange Ra e G ow h Responsi eness Gamma 0.25 0.13 1.54 0.08 1.40 1.65
𝜌 Technology Shock AR(1) Be a 0.8 0.1 0.55 0.07 0.47 0.65
𝜌
P e e ence Shock AR(1) Be a 0.8 0.1 0.58 0.05 0.50 0.67
𝜌 Risk P emium Shock AR(1) Be a 0.8 0.1 0.96 0.02 0.94 0.99
𝜌 Cos -Push Shock AR(1) Be a 0.5 0.25 0.04 0.28 0.04 0.78
𝑠𝑑∗ Fo eign In la ion Shoc
k
S.D. In Gamma 0.5 10 0.47 0.03 0.41 0.52
𝑠𝑑
∗ Fo eign Ou pu Shock S.D. In Gamma 0.5 10 2.18 0.15 1.92 2.42
𝑠𝑑∗ Fo eign In e es Ra e Shock S.D. In Gamma 0.5 10 0.06 0.002 0.06 0.06
𝑠𝑑 Technology Shock S.D. In Gamma 0.5 10 12.57 4.20 7.14 19.50
𝑠𝑑 Mone a y Policy Shock S.D. In Gamma 0.5 10 0.27 0.02 0.24 0.31
𝑠𝑑
P e e ence Shock S.D. In Gamma 0.5 10 29.00 3.27 24.30 34.96
𝑠𝑑 Risk P emium Shock S.D. In Gamma 0.5 10 8.21 0.65 7.14 9.27
𝑠𝑑 Cos -Push Shock S.D. In Gamma 0.5 10 3.79 0.30 3.29 4.27
Sou ce: Au ho ’s calcula ion based on Jus iniano and P es on (2010). S.D. deno es s anda d de ia ion.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 57
ⓒ 2025 Eas Asian Economic Re iew
58 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
V. Resul s
In Chap e V, impulse esponse analysis and his o ical decomposi ion a e conduc ed
based on he es ima ed pa ame e s. The impulse esponse analysis p o ides insigh s in o
he e ec s o each shock on Ko ea’s consume p ice index, while he his o ical
decomposi ion iden i ies he ac o s con ibu ing o in la ion dynamics in Ko ea since
2000. Addi ionally, he analysis e eals he p ima y d i e s o ecen in la ion inc eases
and de i es ele an policy implica ions.
1. Impulse Response Analysis
The i s se o indings comes om he impulse esponse unc ions. In Figu e 3 below,
we p esen hese unc ions, calib a ed using ou es ima ed pa ame e s, o show how
in la ion esponds o each o he model’s eigh shocks. Each panel illus a es he e ec
on consume p ices (CPI) o a (+) 1 s anda d de ia ion shock.
Fi s , he echnology shock lowe s in la ion by nea ly 0.7% in he cu en pe iod, hen
s a s o ebound a e abou h ee qua e s, e en ually ading ou . In con as , he
p e e ence shock s imula es demand and aises in la ion by a ound 0.15% du ing he i s
one o wo qua e s, bu a e ha , in la ion alls below he baseline and la e e u ns o
ze o in he medium o long un.
Fo he mone a y policy (in e es a e hike) and isk p emium shocks, he domes ic
cu ency app ecia es (i.e., he exchange a e declines), consis en wi h UIP. Due o his
cu ency app ecia ion, in la ion shows a sho - e m decline—a ound 0.12% o mone a y
policy shocks and abou 0.06% o isk p emium shocks, occu ing ei he in he cu en
qua e o soon a e wa d.
The cos -push shock is di ec ly linked o highe p ices and exe s a sizable quan i a i e
impac : i aises in la ion by mo e han 0.9% immedia ely ollowing he shock. Unde a
one-s anda d-de ia ion shock o he same size, he cos -push shock exe s he la ges
in luence on in la ion, ollowed by he echnology shock. Finally, o eign ou pu ,
in la ion, and in e es a e shocks ha e a smalle impac ela i e o domes ic shocks, bu
hei e ec s appea igh away and con inue o in luence in la ion o e a ela i ely
ex ended pe iod compa ed o he o he shocks.8
8 While he impac o he o eign ou pu shock on in la ion is ela i ely la ge han ha o o eign in e es
a e o o eign in la ion shocks, i emains ela i ely modes compa ed o he non- o eign shocks. Fo
addi ional esponses o o he a iables o each shock, please e e o Appendix Figu es 2–9.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 59
ⓒ 2025 Eas Asian Economic Re iew
Figu e 3. Impulse Response Func ions o In la ion o Eigh Shocks
a. Technology Shoc
k
b
. Mone a y Policy Shoc
k
c. P e e ence Shoc
k
d. Risk P emium Shoc
k
e. Cos -Push Shoc
k
. Fo eign Ou pu Shock
g
. Fo ei
g
n In la ion Shoc
k
h. Fo ei
g
n In e es Ra e Shoc
k
Sou ce: Au ho
’s calcula ion.
60 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
2. His o ical Decomposi ion Analysis
The second main esul comes om he his o ical decomposi ion shown in Figu e 4(a).
This analysis e eals he ex en o which each shock— echnology (epsa), mone a y
policy (epsm), p e e ence (epsg), isk p emium (epsp), cos -push (epsc), o eign ou pu
(epys), o eign in la ion (epps), and o eign in e es a e (ep s)—has con ibu ed o
Ko ean in la ion luc ua ions since 2000.
Acco ding o ou his o ical decomposi ion, apa om he mos ecen i e yea s,
Ko ea’s in la ion had been ela i ely s able. Du ing pe iods o ising p ices (beginning
a ound he 40 h qua e o he sample, i.e., ollowing he global inancial c isis),
mone a y policy shocks (epsm) and echnology shocks (epsa) played a majo ole in
d i ing in la ion highe . Howe e , in he las wo yea s— oughly om 2022 h ough he
inal six qua e s o he sample— echnology shocks (epsa) con inued o ha e a
signi ican impac on in la ion, while cos -push shocks (epsc) eme ged as a cen al d i e
o ising p ices. No ably, cos -push shocks had p e iously helped s abilize in la ion, bu
hey now con ibu e in he opposi e di ec ion, ep esen ing a new inding.
Figu es 4(b) and 4(c) illus a e his o ical decomposi ions o domes ic goods in la ion
and impo ed goods in la ion, espec i ely. As shown in (c), cos -push shocks ha e been
ueling he ecen su ge in impo p ices. Consequen ly, he in la ion up u n does no
s em solely om domes ic p oduce p ices bu also om highe in la ion in impo ed
i ems. Th ough cos -push shocks, impo p ice inc eases aise domes ic in la ion o e all.
Looking a he a iance decomposi ion con i ms ha cos -push shocks (epsc) accoun
o abou 63% o in la ion (pie) luc ua ions, ollowed by echnology shocks (epsa) a
a ound 30%. By con as , mone a y policy (epsm) and p e e ence (epsg) shocks con ibu e
only abou 3%, while o eign in la ion (epps) and o eign in e es a e (ep s) shocks explain
almos 0%. This sugges s ha , a he han di ec ly cap u ing ex e nal p essu es h ough
shocks like o eign in la ion (epps), he ise in ex e nal cos s is s ongly passed h ough o
Ko ean p ices ia e aile s’ p icing decisions ( he cos -push channel). In o he wo ds,
domes ic in la ion is hea ily in luenced by supply-side ac o s (e.g., impo aw ma e ials
and dis ibu ion ma gins) and p oduc i i y shi s, whe eas he model’s sepa a e o eign
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 61
ⓒ 2025 Eas Asian Economic Re iew
in la ion and in e es a e shocks appea o exe a ela i ely small di ec e ec .9
Since 2022, cos -push shocks ha e come o he o e on in d i ing in la ion highe , due
o soa ing cos s o commodi ies and supply chains unde COVID-19, he Russia–Uk aine
wa , and heigh ened global economic unce ain y. In pa icula , geopoli ical ensions and
pandemic- ela ed bo lenecks ha e pushed up ene gy and aw ma e ial p ices, placing
s ong upwa d p essu e on domes ic in la ion. Thus, wha had been ela i ely mode a e
cos -side p essu es p e-COVID can become ampli ied amid signi ican global ins abili y,
making cos -push shocks a key ac o in ecen changes o in la ion.
B inging oge he hese his o ical decomposi ion indings, he policy implica ion is
ha mone a y policymake s should closely moni o and espond o ex e nal supply cos s
(e.g., impo p ices), domes ic wage and dis ibu ion cos s, and echnological ac o s.
P e iously, cos -push shocks con ibu ed o s able in la ion o had a limi ed e ec unde
ela i ely mode a e p ice p essu es; howe e , hey ha e ecen ly shi ed o d i ing p ice
inc eases h ough su ging impo p ices and o he ex e nal supply-side luc ua ions.
The e o e, i is c ucial o manage and p edic global aw ma e ial and ene gy p ices as
well as domes ic dis ibu ion cos s in a mo e p oac i e way.
Fu he mo e, as he con ibu ion o echnology shocks (epsa) expands, he e is a need
o suppo long- e m sus ainable g ow h in he eal sec o —such as by imp o ing
p oduc i i y—and also o minimize he in la iona y impac o unexpec ed echnological
changes h ough policy measu es ( o example, linking R&D in es men o es uc u ing
policies). Finally, examining he esul s o he his o ical decomposi ion e eals ha
mone a y policy has exe ed a ela i ely la ge in luence du ing pe iods o ising p ices
han when p ices we e declining. In ligh o his, elying solely on policy a e adjus men s
may no be su icien du ing in la iona y phases. The e o e, o p e en supply-side
p essu es and su ging impo p ices om spilling o e in o b oade in la ion, i is
ad isable o employ a ange o ools in andem, including mac op uden ial and
exchange- a e policies.
9 Al hough he o e all quan i a i e con ibu ion o mone a y policy shocks o in la ion appea s ela i ely
small o e he en i e pe iod, hei e ec du ing episodes o ising in la ion seems signi ican . In o he
wo ds, mone a y policy ends o ha e an asymme ical impac on in la ion, exe ing a s onge
in luence when p ices a e on he upswing compa ed o when hey a e declining.
Figu e 4. His o ical Decomposi ion o Ko ea’s In la ion
(a) In la ion
62 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
Figu e 4. Con inued
(b) Home goods p ice in la ion
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 63
ⓒ 2025 Eas Asian Economic Re iew
Figu e 4. Con inued
(c) Impo ed goods p ice in la ion
No e: epsa = echnology shock, epsm = mone a y policy shock, epsg = p e e ence shock, epsp = isk p emium shock, epsc = cos -push shock, epys =
o eign ou pu shock, epps = o eign in la ion shock, ep s = o eign in e es a e shock. The solid line ep esen s Ko ea’s consume p ice index
wi h ends and seasonali y emo ed.
Sou ce: Au ho 's calcula ion.
64 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 71
ⓒ 2025 Eas Asian Economic Re iew
Appendix Figu e 4. Impulse Response Func ions o P e e ence Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
72 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
Appendix Figu e 5. Impulse Response Func ions o Risk P emium Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 73
ⓒ 2025 Eas Asian Economic Re iew
Appendix Figu e 6. Impulse Response Func ions o Cos -push Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
74 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
Appendix Figu e 7. Impulse Response Func ions o Fo eign Ou pu Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
The D i e s o In la ion in Ko ea: Insigh s om a Small Open DSGE Model 75
ⓒ 2025 Eas Asian Economic Re iew
Appendix Figu e 8. Impulse Response Func ions o Fo eign In la ion Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
76 Kyunghun Kim
ⓒ Ko ea Ins i u e o In e na ional Economic Policy
Appendix Figu e 9. Impulse Response Func ions o Fo eign In e es Ra e Shocks
No e: c = consump ion, y = GDP, = policy in e es a e, s = e ms o ade, pie = CPI in la ion a e, lop =
law o one p ice gap, a = ne o eign asse posi ion, pi = impo ed goods p ice, e = exchange a e.
Sou ce: Au ho ’s calcula ion.
