Medium-Term Business Cycles in Korea

Studies of business cycles are primarily concerned with understanding short-run fluctuations. Over the past few decades, however, many countries have experienced persistent long-lasting swings in economic activity. As growth slows down recently, the length of business cycle fluctuations in Korea has been extended as well. We study medium-term business cycles in Korea. Using a band pass filter, we decompose key macroeconomic variables into various frequency components, and find that the medium-term cycle in Korea is much larger, more volatile and more persistent than the conventionally measured high frequency business cycle. The conventional high frequency fluctuations account only for 20-50% of the medium-run fluctuations in major macroeconomic variables. In major recession episodes, the medium frequency component tends to start contracting before the high frequency component declines. Fluctuations in the real macroeconomic variables such as GDP, consumption, investment and net exports are largely explained by the medium frequency variations, whereas inflation is largely a high frequency phenomenon.