Bank of Korea has been using the BOK12, a traditional Keynesian simultaneous equation model, along with dynamic general equilibrium models, such as the BOKDSGE, to analyze responses of macro variables to economic shocks. As a backward-looking model based on the estimation of behavioral equations, the BOK12 is subject to the Lucas critique in that it does not reflect economic agents' rational expectations for the future. However, numerous central banks continue to run similar models due to their flexibility and highly accurate forecasting power.
As the BOK12, constructed in 2012, has been limited in its ability to reflect recent changes in economic conditions, the Bank of Korea has reconstructed the BOK20 model to supplement it. The BOK20 model extends the end of the estimation period from the existing end-2011 to Q1 2019 and reflects changes in economic variables stemming from the revision of the base year for the national accounts statistics to 2015. The BOK20 model also reflects recent changes in economic theory and economic structure, including monetary policy endogeneity, changes in the demographic structure, increased uncertainty, and changes in foreign trade conditions. Besides, as local governments and social security funds have recently taken up larger shares in the general government, the relationship between the consolidated fiscal balance and the national accounts has weakened. In this respect, in the new model, the fiscal sector has been aligned with the national accounts. This paper explains the main improvements in the newly constructed BOK20 model, and its structure and features, and derives the elasticities of macro variables to economic shocks, which form the basis of macroeconomic forecasts and policy analyses.