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The Drivers of Inflation in Korea: Insights from a Small Open DSGE Model

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Abstract

This study analyzes the drivers of inflation in South Korea using a Dynamic Stochastic General Equilibrium (DSGE) model tailored to the characteristics of Korea as a small open economy. Employing quarterly data from 1999Q2 to 2023Q2, Bayesian estimation is used to estimate Korea-specific parameters. Based on the estimated parameters, impulse response analysis and historical decomposition are conducted. The results indicate that cost-push shocks tied to imported goods pricing have been the primary driver of recent inflation surges in Korea. Accordingly, policymakers need to adopt a comprehensive approach—including not only monetary policy but also macroprudential measures and raw material supply management—to mitigate supply-side inflationary pressures effectively.

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  • Kim, Kyunghun, 2025. "The Drivers of Inflation in Korea: Insights from a Small Open DSGE Model," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 29(1), pages 41-76, March.
    • Handle: RePEc:ris:eaerev:0444
    DOI: 10.11644/KIEP.EAER.2025.29.1.444
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    Keywords

    Inflation; Dynamic Stochastic General Equilibrium; Bayesian Estimation; Cost-push Shocks;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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