Author : Bongseok Choi(Kookmin University), Hyun Hak Kim(Kookmin University), Sangho Shin(Bank of Korea)
<Abstract>
This study examines the impact of global supply chain shocks on South Korea's production costs by considering the supply chain dependency of domestic industries, as reflected in the Multi-Regional Input-Output (MRIO) table. Using the methodology of Auer, Levchenko, and Sauré (2019), we calculate the cost shocks based on South Korea's import dependency within global supply chains. We then present the impulse response functions for changes in pure costs by industry, which exclude global supply chain shocks. The FAVAR model analysis shows that an appreciation of the Korean won leads to a reduction in domestic production costs across various items, while increases in international oil prices and freight indices raise domestic production costs. However, industries such as mining and petroleum refining show different reactions, reflecting the vulnerability of South Korea's industrial structure to energy imports such as oil price shocks. Moreover, the more closely domestic cost functions are linked to global value chains (GVCs), the more they are affected by global economic conditions. This result suggests a positive correlation between the expansion of GVCs and inflation synchronization across countries.