The Korean Journal of Economic Studies
Uncovering Regional Economic Fluctuations by Factors and Their Impacts on the Regional Confidence Cycle: Evidence from Busan
Inhwan So (Bank of Korea), Choon Sung Lim (Bank of Korea) and Soosung Moon (Bank of Korea)Year 2023Vol. 71No. 3
This paper investigates the economic fluctuations in different regions of South Korea, focusing on Busan, which has experienced significant disparities in growth rates compared to other regions. Using a dynamic factor model, we decompose variations in regional economic variables into a common national factor and a regional factor and assess the impacts of each factor. Our findings indicate that a national factor has a more significant impact on Busan’s economic fluctuations than regional factors. Nevertheless, despite its association with the national business cycle, the persistence of negative regional factors has hindered Busan’s growth rate from narrowing the gap. To explain this phenomenon, we examine a potential cause—a vicious cycle in which negative regional factors can exacerbate economic expectations and adversely affect regional factors again. Using a VAR model, we demonstrate that such concerns are not significant, as the regional factor does insignificantly impacts local consumer expectations, while positive national shocks positively affect consumer sentiment in Busan over an extended period.