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  • P-ISSN 1738-656X

한국개발연구. Vol. 14, No. 4, December 1992, pp. 3-26

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A Long Run Classical Model of Price Determination (Written in Korean)

박우규; 김세종

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The purpose of this paper is to construct a price determination model of the Korean economy and to find out the propagation mechanism of monetary and fiscal policies. The model is a small-size macroeconometric model consisted of ten core equations: consumption, investment, exports, imports, consumer price index, wage rate, corporate bond rate, potential GNP, capital stock, and GNP identity. The model is a Keynesian model: consumer price index is determined by markup over costs, and wage rate is expressed by Phillipse curve relation. Two features of the model, however, distinguish this model from other macroeconometric models of the Korean economy. First of all, the estimation of potential GNP and the capital stock is endogenized as suggested by Haque, Lahiri, and Montiel (1990). This allows us to calculate the level of excess demand, which is defined as the difference between the actual GNP and the potential GNP. Second, interest rate, inflation and wages are all estimated as endogenous variables. Moreover, all quantity variables include price variables as important determinants. For instance, interest rate is an important determinant of consumption and investment. Exports and imports are determined by the real effective exchange rate. These two features make the interactions between excess demand and prices the driving forces of this model. In the model, any shock which affects quantity variable(s) affects excess demand, which in turn affects prices. This strong interaction between prices and quantities makes the model look like a classical model over the long run. That is, increases in money supply, government expenditures, and exchange rate (the price of the U.S. dollar in terms of Korean won) all have expansionary effects on the real GNP in the short run, but prices, wage, and interest rate all increase as a result. Over the long run, higher prices have dampening effects on output. Therefore the level of real GNP turns out to be not much different from the baseline level; on the other hand, the rates of inflation, wage and interest rate remain at higher levels.

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