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Economic Papers Vol.3 No.2

Group :
연구조정실 (Monetary Studies Team(tel : 82-2-759-5407, fax:82-2-759-5410)) 2000.12.28 10828

Contents for Economic Papers Vol.3 No.2
* Economic Papers was first published in January 1998 by the Bank of Korea, and it will appear twice a year.
* Opinions expressed herein are those of the authors and not necessarily those of the Bank of Korea. The authors will be glad to receive comments on their articles.

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1. Gold and Paper Money in Light of Marx´s Value Theory (Chai-on Lee)
2. Searching for New Monetary Aggregates in Korea (Min Chang and Jeong-Ho Hahm)
3. Potential GDP and Inflation in Korea (Chiho Kim and So-Sang Moon)
4. Forecasting Growth and Inflation when Financial Markets are changing (Byeong Cheol Cheon)
5. The Interest Rate Sensitivity of Commercial Bank Stocks in Korea(Hyung-geun Park and Eek June Chung)
6. Trade and Real Business Cycles in a Small Open Economy : The Case of Korea(Hyung-soo Park)
7. Inter-industrial Productivity Spillovers in the Korean Manufacturing Sector (Hee-Sik Kim)

Gold and Paper Money in Light of Marx´s Value Theory
Author: Chai-on Lee
Full Text : EP_3_2_1_ChaionLee.pdf
Summary: This paper argues that the gold money, the gold standard and the fiat money systems all can be explained in terms of a common principle regarding the determination of money value and the mode of money supply. This is premised on the classical and Marxs value theory especially when arguing against the quantity theory of money. The seignorage in the monetary issuance will be seen as a pure transaction cost for the monetary accommodation of commodity trades, an overhead cost of commodity production that makes a deviation between the nominal and the real value of commodities

Searching for New Monetary Aggregates in Korea
Author: Min Chang and Jeong-Ho Hahm
Full Text: EP_3_2_2_MinChang.pdf
Summary: Although Korea has maintained a monetary targeting framework in conducting monetary policy, the usefulness of monetary aggregates as an intermediate target has recently been deteriorating amid the rapid changes in the financial environment. In addition, Korea has specific problems concerning its monetary aggregates which were organized on an institutional basis, rather than a liquidity basis meaning that they are incapable of reflecting actual liquidity level in the economy effectively. The changes in policy conditions including the transition to an information variable approach through an introducing inflation targeting framework, moreover, requires some plans to enhance the efficiency of monetary policy. Taking these factors into account, the need has arisen to examine ways of improving the current monetary aggregates. On the basis of this recognition, we examine the definition and requirements of monetary aggregates and make a trial calculation of several monetary aggregates, which are then analyzed and compared to current monetary aggregates. Finally, we propose monetary aggregates which seem to be the most suitable for the Korean economic situation. As a result of the analysis, the monetary aggregate newly organized on a liquidity basis proved not only consistent with the definition of monetary aggregates but also useful as policy indexes. This implies that organizing monetary aggregates on a liquidity basis can be desirable to enhance the effectiveness of future monetary policy.

Potential GDP and Inflation in Korea
Author: Chiho Kim and So-Sang Moon
Full Text : EP_3_2_3_ChihoKim.pdf
Summary :  In this paper, we first estimated Korean potential GDP based on the production function approach, after which we used it to calculate the output-gap and evaluated the degree of inflationary pressures.  According to the results of the estimation, prior to the foreign exchange crisis, potential GDP had maintained a growth rate of the order of 6-7%, but during 1998-1999, it showed a decrease to the level of 4%.  This is regarded as having been triggered by deceleration of the growth trend of available capital following the foreign exchange crisis, in which capital investment was greatly subdued and the natural rate of unemployment soared due to structural changes in the labour market.  Then, using potential GDP, we analyzed the output-gap, which is assumed to hold useful information for the evaluation of inflationary pressures.  The result of the analysis showed that the output-gap rate maintained a close relationship with the business cycle, leading inflation 2-3 quarters and influencing it for around 3 years.  Therefore, it is suggested that this kind of lag structure should be taken into account when conducting macroeconomic stabilization policy.

Forecasting Growth and Inflation when Financial Markets are changing
Author: Byeong Cheol Cheon
Full Text : EP_3_2_4_BCCheon.pdf
Summary : Nowaday, financial innovations make it difficult to forecast growth and inflation with monetary aggregates, so this paper considers two alternative monetary aggregates to  enhance the robustness of the forecasting model. The first method constructs the monetary aggregate by switching from a narrower aggregate to a broader aggregate at a specific point. The second method uses a time varying parameter as the weight of subaggregates of monetary aggregates.  According to the results of the empirical test, both methods enhance the accuracy of the forecast models.

The Interest Rate Sensitivity of Commercial Bank Stocks in Korea
Author: Hyung-geun Park and Eek June Chung
Full Text : 5HyunggeunPark.hwp
Summary : This paper estimates the interest rate sensitivity of Korean bank stocks using a two factor model and examines its relation with the maturity composition of bank assets and liabilities. For the period 1990~1993, the first-phase of Korean financial liberalization, we found no evidence for the reaction of bank stock prices to interest rate changes. But for the period 1994~1997 when financial liberalization accelerated, we found a relatively strong interest rate sensitivity of bank stocks. And in the period after the financial crisis,  bank stocks showed  low sensitivity to interest rate changes. In addition, cross section variation in the interest rate sensitivity measure is not significantly related to the maturity mismatch between bank assets and liabilities. This result reveals that information on the maturity composition of an individual bank is not reflexed in the price of its stocks in the financial market.

Trade and Real Business Cycles in a Small Open Economy : The Case of Korea
Author: Hyung-soo Park
Full Text : 6HyungsooPark.hwp
Summary : There is active research into Real Business Cycle(RBC) models in developed countries and there has been a little in Korea. But Korean RBC models have limits in applying RBC theory to the actual economy such as setting up a model of a closed economy or a world economic model.  This paper will analyze the Korean economy in the light of an open economy and set up a realistic RBC model, especially reflecting the trade structures of the Korean economy. In this model economy, certain shares of domestic consumption and investment are met by foreign commodities. Considering that the foreign demand for domestic goods is largely dependant on the state of the world economy, exports from the Korean economy are taken as an exogenous variable. Also this small open economy is set such that the terms of trade and the world interest rate are exogenously driven. From the results of the simulation, I find that this model can reproduce quite well the stylized facts of Korean business cycles, including the trade cycle.  Further, the sensitivity analysis of the model shows that an increase in the foreign dependency of investment amplifies domestic business cycles while consumer expenditure's foreign dependency has no such effect. This implies that when analyzing Korean business cycles, we should pay more attention to changes of the trade structure including the dependency of investment expenditure on foreign economies.  The impulse response analysis concludes that the Korean economy responds most to a productivity shock followed by changes in the terms of trade, the world's demand for domestic goods and services, and the world interest rate.

Inter-industrial Productivity Spillovers in the Korean Manufacturing Sector
Author: Hee-Sik Kim
Full Text : 7HeesikKim.pdf
Summary : This paper posits that sustained productivity growth entails division of labor to evolve and that this can be detected by checking whether inter-industrial productivity spillovers are in operation. It attempts to measure the parameters of a productivity growth model, which is a transformed growth regression model. The parameters of the model consist of economies of scale, suppliers-driven spillovers, and customer-driven spillovers. The estimation results from analysis of panal data with twenty-two Korean manufacturing industries from 1971 to 1996 show that inter-industrial spillovers, especially supplier-driven spillovers, were meager, while economies of scale were witnessed only in the short run, not in the long run. These findings are interpreted as reflecting the underdevelopment of the materials and parts industry, but more importantly the shallow division of labor in Korean manufacturing. Estimation results with the sample divided into three periods, 1971~1979, 1980~1988, and 1989~1996, showed few improvements in terms of supplier-driven spillovers; rather they indicated a deterioration in the economies of scale parameter over the time periods, until diseconomies of scale prevailed in the last period. Beside this, a comparison of the parameter estimates with those for the U.S.A. confirmed that the division of labor in the Korean manufacturing sector had not evolved to the degree typical of an advanced economy. The shallow division of labor in Korean manufacturing, in turn, is conjectured to have stemmed not only from the short history of industrial development and the consequent lack of experience in creating new knowledge, but also from the lack of properly working networks, especially a national innovation system promoting competition and cooperation among industries for innovation.