ADJUSTMENT COST ON INVESTMENT AND UNDER- UTILIZATION OF MAXIMUM INSTALLED CAPACITY IN SOUTH KOREAN BUSINESS CYCLE - A BAYESIAN NEW KEYNENSIAN MODEL
DOI:
https://doi.org/10.2478/eoik-2025-0026Abstract
This study examines the effects of adjustment costs on investment and the under-utilization of maximum installed capacity within South Korea using a New Keynesian business cycle with a Bayesian approach. The New Keynesian business cycle model incorporates both investment frictions and capital under-utilization. The model has been calibrated specifically for the South Korean economy. The model estimation uses Markov Chain Monte Carlo (MCMC) methods along with the Metropolis-Hastings algorithm to draw samples from the posterior distributions of the model parameters.
The fitness of the model is rigorously validated through several tests. It includes likelihood ratio tests and out-of-sample forecasting tests. Policy metrics coefficients reveal that productivity shocks have immense effects on investment dynamics and capacity utilization. The research includes a thorough examination of policy response coefficients, correlations among economic variables, and variance decomposition. By examining these studies, it is clear that adjustment costs have a significant impact on economic fluctuations, making it crucial to consider these effects in policy formulation.
The model’s robustness is verified through sensitivity analysis, which involves checking the convergence and efficiency of various MCMC simulations and varying degrees of mark-up price and wage shocks. This research provides valuable insights into how adjustment costs and policy responses shape the South Korean business cycle and offers implications for economic policy and management.
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