Impact of the 1997 Crisis on Korea's Growth Trend: Unobserved Component Model Based Analysis

Abstract

We offer a systematic examination of the extent of permanence of the adverse influence of the 1997 crisis and its aftermath on Koreas potential GDP trend by employing unobserved component models that decompose observed output into a stochastic trend and a stationary cycle. We consider models that allow a nonzero covariance between trend and cycle innovations. Results from several unobserved component models indicate that long-term trend growth rate has shifted downward in the post-1997 crisis period as the event seemed to have left some permanent adverse impact. At the same time, output gaps measured using output-Phillips curve models have remain negative in the same period. Results seem to suggest that it is premature to make such pronouncements that the Korea economy has now entered an era of low growth. Say, an annual growth rate in the 4% range.