Openness, growth, and inflation: Evidence from South Korea before the economic crisis

The effects of increasing openness on economic growth and inflation are examined for the South Korean economy before the economic crisis of 1997/1998. The framework of analysis is a seven-variable vector autoregressive model. The impulse response functions indicate that a shock to openness has negative effects on the growth rates of output and of the price level, but no longer-run effects. The variance decompositions also indicate significant effects on these variables, and the results appear to be robust across lag lengths, variable orderings, and alternative openness measures. The negative output effect of increasing openness appears to be consistent with some models in which increased international competition due to openness may cause domestic investment to shrink and its reduction would be greater than an increase in capital inflows. In this case, net investment falls. The negative price effect of openness is also consistent with the general belief that increasing openness reduces tariffs and hence lowers import prices. The decrease in net investment also reduces the price level.