International Macroeconomic Fluctuations in Korea

This paper examines international macroeconomic fluctuations in Korea by focusing on the sources of fluctuations in key international macro variables, such as cross-country output differential, real exchange rate, and trade balance and international transmission of key structural shocks. These structural shocks include countryspecific supply, demand, and nominal shocks. A structural VAR model with long-run restrictions (that are consistent with many theoretical models) is constructed to investigate these issues. The main findings are: (1) supply shocks explain most of the fluctuations in cross-country output differential; (2) all three types of shocks play a non-negligible role in explaining fluctuations in real exchange rate and trade balance; and (3) demand and supply shocks generate opposite signs of correlation between trade balance and real exchange rate.