The price of imports and TFP: Application to the Korean crisis of 1997–1998

This paper studies the effects of import-price shocks on measured output and productivity in a standard small open economy model and quantifies such effects in the case of the Korean crisis of 1997–1998. I argue that it is the price of imported goods relative to the price of domestic goods but not the terms of trade that determine measured output and productivity. The simulated results show that shocks to the price of imports account for about half of the output deviation (from trend), one third of the TFP deviation and two thirds of the labor deviation in 1998. For the quantitative results, the extent to which the usage of imported goods is distorted is critical and substantially larger than tariffs because of significantly sizable non-tariff distortions.

► I study the impact of import-price shocks on measured output and productivity.
► The import price rather than terms of trade determines measured output and productivity.
► The impact of import-price shocks on TFP is increasing in the extent of import distortions.
► Non-tariff distortions make the extent of import distortions larger than the tariff rate.
► The import price is an important source of fluctuations in output and TFP during the Korean crisis.