Short-run macro-economic adjustment policies in South Korea : a quantitative analysis
van Wijnbergen, Sweder
The subject of this Working Paper is an analysis of the startling reversal of performance in 1979 and 1980, compared with the preceding 15 years, of the South Korean economy, and an exploration of the short-run macro-economic policy options available to Korea in 1981. To do this the author uses a quarterly econometric model presented in the first part of this paper. This model explicitly incorporates the financial structure typical for Korea, and, for many other LDS's. The role of commercial banks, foreign capital inflows (determined endogenously in this model) and Unorganized Money Markets and the use of credit obtained from these sources to finance fixed and working capital are highlighted. The explicit incorporation of intermediate imports as a factor of production, and of an agricultural sector make the model appropriate for an analysis of the 79/80 period, characterized by a bad harvest and repeated oil shocks. This model is used first to provide a quantitative analysis of the 79/80 period, trying to disentangle the role of various exogenous shocks and domestic policy measures. Short-run policy alternatives are also explored. Specifically, a scenario combining tight fiscal and monetary fiscal stimulus and gradual reductions in the real price of food to world prices.
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