Appendix I.1. Model Equations and Parameterization
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Dongchul, Cho and Song Joonhyuk, 2008, “The Cause and Prospect of Current High Inflation Trends,”(in Korean), Economic Outlook of the Korea Development Institute, pp. 165–73, (Seoul, Korea).
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Kim, Joonwon, and Youngki Shon, 2002, “Structural Estimates of the Sacrifice Ratio: The Case of Korea,” Economic Studies, Vol. 50, No. 2, pp. 185–206 (in Korean).
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Prepared by Erik Lueth.
The equilibrium real exchange rate in Figure I.1 has been derived with an augmented HP-filter and is distinct from the equilibrium exchange rate generated by the CGER exercise.
Equilibrium values are derived with the help of an augmented HP-filter that leaves room for value judgments. For example, the smoothing procedure can be programmed to produce a zero output gap in a particular year.
In the Korean context it may also be explained by the strain abrupt interest rate hikes would put on households given the predominance of flexible rate mortgages.
Since the model is a two-country model, U.S. growth is determined endogenously and stays below the baseline for several quarters. The U.S. growth shock does not affect oil prices which are exogenous in the model, hence, simulated effects on Korean growth and inflation should be considered as upper and lower bounds, respectively.