Author : Kwang Hwan Kim·Taekyung Kim

  In this paper, we investigate the so called 'consumption puzzle' that the volatility of consumption relative to income is higher in emerging countries than in the developed countries from the viewpoint of two well-known theories that permanent shock mainly contributes to this phenomenon or transitory shock can almost explain the fluctuation of consumption. In order to conduct investigation, we estimated a small open economy RBC DSGE model using Korean and Mexican data and analyzed the estimated results through the methods of variance decomposition, impulse response and simulation. We found that it is hard to say that the excessive consumption volatility of all the emerging countries are affected by the same source in that each exogenous shock’s role varies by countries. While in Mexico transitory shock combined with financial friction induces the excess consumption volatility, in Korea permanent shock does. Especially in Korea permanent shock combined with financial friction can explain not only the excessive consumption volatility but also the change of interest rate, which is clearly different result from the previous studies.