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Economic Policy and Microeconomic Volatility

Author Park Moonsoo, Kim Youngmin, Kim Jongho Date 2016.12.27 Page
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1. Formulating the Problem


The economic policies of countries are often geared toward stimulating and promoting economic growth by mitigating the volatile influences of macroeconomic variables, such as inflation, foreign exchange rates, and interest rates. However, policies that pursue economic growth do not affect microeconomic variables, such as the behavior of firms, households, and individuals, in the same way and to the same extent as they do macroeconomic ones. Aside from the differences in how microeconomic and macroeconomic variables respond to the given policy, significant differences can be observed at even the same microeconomic level, depending on how specific economic agents respond to such policy. It is therefore important to analyze and understand how a given country’s ?economic policy affects macroeconomic and microeconomic variables, as well as how it influences households and firms’ expectations of economic stability or volatility. 


To analyze the correlation between economic policy and microeconomic variables, we need to consider two possibilities. First, a trade-off of sorts may take place between a given country’s economic growth policy and the freedom of microeconomic agents. The implementation of a growth-oriented economic policy may help reduce macroeconomic uncertainty, but may also simultaneously aggravate microeconomic volatility, thus increasing uncertainty for households, individuals, and firms. Second, microeconomic agents may respond to, and be affected by, the same given economic policy quite differently. This has to do with the growing income inequality and polarization among households, individuals, and firms. 


In this study, we examine the extent to which the changing economic policy of South Korea affects microeconomic volatility for households, individuals, and firms, and what factors are driving the changes in microeconomic volatility facing these agents. The data we use to analyze economic volatility facing firms and individuals are not wholly consistent, and thus impose some limitations on the implications of our findings. Nevertheless, the findings of our analysis shed light upon which factors serve to minimize microeconomic volatility for these actors and the differences in the ways the same policy affects these different microeconomic agents.