External Shocks and Inflation in theTrade-Dependent Korean Economy: A SVAR Approach

This paper estimates the inflationary effects of globalization and other nonmonetary factors and then presents a statistical decomposition of the rate through a structural VAR using monthly and quarterly data. The major results of this study are summarized as follows: First, the CPI inflation rate in Korea reflects an increased exchange rate, import price inflation, and positive external demand. Second, the impacts of economic growth and import price on CPI inflation appeared relatively greater. Third, the inflationary effects of external shocks using the quarterly data are similar to those using monthly data except for the impact of oil price inflation shock. In conclusion, nonmonetary international factors influenced inflation dynamics in Korea in addition to the monetary shocks. Therefore, it is recommended that in order to reduce excessive fluctuation in CPI inflation, an import-dependent economy such as Korea should ease its excessive dependence on high-cost foreign intermediates over the long-term through import-substitution policies and allow a real appreciation of the domestic currency.