Effects of a shock from specific region or country is gaining focus from academia and policy makers since connectivity among countries has been deepening. Recent global financial crisis, in year 2008, have confirmed the fact that local crisis from a specific country can be rapidly transformed into a crisis in global perspectives via financial and trade networks.
As a typical small and open economy, Korea should pay more attention to the domestic aftermath by a shock from foreign markets. To improve predictability of economic forecast and to enhance effectiveness of economic stabilization policies, quantitative information about ripple effects of an economic shock to sectors is essential.

KIET has been developing various econometric models to cope with demand from the private sector as well as governmental bodies. This research is in line with those efforts.
This research puts efforts to overcome limits of previous econometric models in various aspects. There has been vast array of researches on identifying effects of foreign shocks to domestic market. However, there few of them explicitly considered connectivity among countries and domestic sectors. This is because of the difficulty in estimating a model with many parameters when including domestic and foreign economic variables and other sector variables. This study utilize and extend the Global VAR which is gaining focus from vast pool of researchers to coordinate with the goal of this research, and to overcome limits of previous researches.
Significance of this research lies in the fact that we extend previous Global VAR which had specific focus on connectivity among countries to a model that integrates entire sectors as well as countries. VAR model is widely used by various institutions as a main tool for analyzing dynamic effects of an economic event. Hence, it is meaningful to provide a methodology of analyzing relationship between macroeconomic variables of entire countries and domestic sector variables in a unified VAR model. Another significance of this study can be found in usage of sign-restriction identification method, which is one of the latest developed econometric techniques, to analyze dynamic effects of domestic and foreign structural shocks.
By using these new methods, this study analyzes effects of US interest rate increase, deflation in EU area, and domestic interest rate increase to sector variables. As many policy makers, researchers, and private sector officers have high interests in potential effects of those three shocks, estimation results of this research can serve as an important reference in the future.
According to the estimation results, one percent point increase in the US interest rate is estimated to decrease overall real GDP by 0.52 percent, real exports by 0.74 percent, and real imports by 0.71 percent respectively during one year period. Also, by time periods, the interest rate shock of US to Korea is more stronger than before. By sectors, real exports and real GDP decreased more in general purpose machinery, electronic equipments, metals, precision instruments, petroleum and chemical products, and transport equipments.
One percent decrease in inflation of Euro area is estimated to decrease overall real GDP by 0.16 percent, real exports by 0.53 percent, and real imports by 0.64 percent during one year period. By time periods, shocks in Euro area were slightly more effective to Korean industrial GDP, exports, and imports than before. By sectors, as similar to the case US interest rate shock, impacts on Korean primary sectors in exports, such as general purpose machinery, electronic equipments, metals, petroleum and chemical products, transport equipments, textiles and leather, and precision instruments were relatively higher.
Finally, one percent point increase in the domestic interest rate is estimated to decrease overall real GDP by 0.13 percent and real exports by 0.47 percent. The smaller impact of domestic interest rate shock is due to ineffectiveness of domestic interest rate shock outside the boundary of domestic market. Real imports is estimated to increase by 0.43 percent in accordance to appreciation of Won affected by increased interest rate. By time periods, different to previous results, domestic interest rate shock to overall GDP is rather unchanged. Impacts on sectors heavily exporting and producing durables, such as electronic equipments, textiles and leather, precision instruments, petroleum and chemical products, transport equipments, and etc., were relatively higher.