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BOK Working Paper No.2017-3, Price Stabilizing Effects of the FTAs: The Case of Korea

Economic Research Institute (+82-2-759-5473) 2017.01.22 5424

 

Title : Price Stabilizing Effects of the FTAs: The Case of Korea
Authors : Noh-Sun Kwark(Sogang University), Hosung Lim(BOK)


<Abstract>

 

 This study empirically estimates how much FTAs affect domestic inflation rates. Most previous studies have been interested in the economic effects of FTAs such as the effects on economic growth, income distribution across industries, price competitiveness for international trade, trade volume, and the price of a commodity. The purpose of this study is an econometric estimation of the price stabilization due to FTAs and an analysis of how FTAs affect inflation rates based on panel data estimations.
 The main results are summarized as follows. First, from an analysis on 72 detailed items which estimates the pricing equations for the 72 detailed items, calculates the but-for-price after FTAs started, and gets the weighted price index, we find that FTAs reduce the CPI inflation rate by 0.76%p at an annual basis from the second quarter of 2004 to the second quarter of 2015. Second, the aggregate data analysis estimates the effect of FTAs on the CPI inflation rate as -0.52%p and the effect of the global financial crisis on the CPI inflation rate as -0.47%p. Third, the panel data analysis for the OECD countries also shows a significant and consistent inflation reduction effect of FTAs, such effect is more significant than the effect of traditional openness on inflation rates. The inflation reduction effect of FTAs is more significant in countries with a low level of openness.

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