Oil Shocks in a DSGE Model for the Korean Economy

Sungbae An and Kang Heedon

in Commodity Prices and Markets

Published by University of Chicago Press

Published in print March 2011 | ISBN: 9780226386898
Published online February 2013 | e-ISBN: 9780226386904 | DOI:
Oil Shocks in a DSGE Model for the Korean Economy

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This chapter describes the oil shocks using a dynamic stochastic general equilibrium (DSGE) model for the Korean economy. The Korean economy depends entirely on imports for its acquisition of crude oil, and households, entrepreneurs, and policymakers are interested in knowing to what extent the rise in oil prices affects the economy. Within an Bayesian estimation framework including DSGE-vector autoregressions (VARs), the empirical analysis used is based on Korean aggregate data. Using Bayesian analysis, the model is used to check the importance of each channel that transmits an oil price shock to the economy. It is found that the model economy produces reasonable posterior estimates of the structural parameters and works relatively well compared to impulse responses from the VAR with optimal prior weight from the DSGE model. A more elaborated model on government behavior is anticipated to investigate the pass-through of oil price shocks.

Keywords: Korean economy; imports; dynamic stochastic general equilibrium model; DSGE; vector autoregression; VAR; oil price shocks; Bayesian analysis

Chapter.  10826 words.  Illustrated.

Subjects: Business and Management

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