<Abstract>

We estimate housing policy uncertainty (HPU) in Korea, employing the economic policy uncertainty (EPU) method by Baker et al. (2016). The uncertainty index is measured by the frequency of texts in Korean newspapers that imply housing policy uncertainty during 1997-2022. The HPU index was high during the presidences of Roh Moo-hyun and Lee Myung-bak and has risen again since 2020. Also, HPU tends to increase when there are large housing market policy announcements, political instability, or changes in administrative regimes. We also analyze the effects of HPU on housing markets by estimating a vector autoregressive (VAR) model. The VAR results suggest that a rise in HPU negatively affects housing prices and residential construction but increases housing price volatility. Meanwhile, a positive shock in housing prices endogenously raises HPU, which suggests that uncertainty was typically more significant under policies that aim to stabilize the housing market and prevent from overheating.

<Abstract>

This paper analyses the impact of tariffs and non-tariff measures on trade in decarbonization technology products and the relationship between tariffs and non-tariff measure. The results vary by income group. The impact of tariffs on export price was not statistically significant across all income groups, but non-tariff measures had a statistically significant positive effect on high income and upper-middle income countries. As for import volumes, non-tariff measures have a bigger influence on the import flow of decarbonization technology products than tariffs in high income countries, while both tariffs and non-tariff measures are important factors in upper-middle income, lower-middle income, and in low income countries. The results of the relationship between tariffs and NTBs suggest that they have substitution effects.

<Abstract>

This study visits a recent issue in the offline distribution market. Specifically, we analyze the effects of hypermarket closing on sales in nearby local shopping districts. We looked at the Lotte Marts in Dobong and Guro districts that closed in November and December 2020, respectively. Local shopping areas neighboring these closed stores were taken as the treatment group, and the commercial districts near the Lotte Mart locations in adjacent districts in Dobong and Guro branches were taken as the control group for a difference-in-differences analysis. Findings indicate that the closing of these hypermarkets led to an immediate decline in sales at nearby local businesses within a 2 km radius, with an overall decrease of about 5.3% in sales, decomposed as a 5.0% drop in weekday sales and a 7.8% fall in weekend sales. Mom-and-pop stores experienced a 7.5% sales drop, and the number of transactions decreased by 8.9%. Traditional markets and developed commercial districts also saw changes in sales, but these were not statistically significant. The study’s conclusions remain consistent across various analytical models. Further analysis revealed that the decline in sales in the surrounding districts was due to a decrease in foot traffic following the closing of the larger retailer. These findings offer new insights into the dynamics between hypermarkets and small, local stores, highlighting the need for new strategies to ensure the survival of conventional retail in an era of growing online sales.

<Abstract>

In the event of an economic crisis, financial stability will also deteriorate if companies' performance falls sharply and profitability does not improve thereafter. Accordingly, there is a high need to select industries for liquidity support, and this paper proposes a plan and applies it to the COVID-19 case. Using financial data from external audit companies between 2008 and 2020, this paper analyzes financial stability through estimating the probability of cash crunch risk by industry. Then it derives liquidity support targets and evaluates liquidity support effects. Together with this, it evaluates the inefficiency of resource allocation through estimating the effect on productivity of companies vulnerable to financial stability by industry, and it presents implications for efficient support when government funding is limited. The result of this analysis is that when considering the inefficiency of resource allocation over the support effect in liquidity support due to the COVID-19 shock, transportation and lodging-and-restaurant industries are prioritized support targets, and construction industries are subordinated support targets among the industries in 18 KSIC sections. In addition, among the manufacturing industries in 24 KSIC divisions, automobile-and-trailer manufacturing industries become prioritized support targets, and other-transportation-equipment manufacturing industries become subordinated support targets.

<Abstract>

According to the monetary policy trilemma, countries cannot simultaneously achieve the three goals of exchange rate stability, monetary independence, and capital openness. In this study, we offer empirical evidence on the monetary and financial quadrilemma regarding the trade-off relationship between financial stability and the traditional trilemma variables. Further, we investigate whether macroprudential policy can mitigate this trade-off relationship of four objective variables. Using a data set from 116 countries for the period 2000–2013, we find that macroprudential policy has the potential to relax the traditional trilemma and quadrilemma constraints.

<Abstract>

The Great East Japan Earthquake triggered a paradigmatic shift in Japan’s trade patterns, accentuated by an increased asymmetry between yen exchange rate fluctuations and export flows. Using a Vector Autoregression with exogenous variables (VARX) model, this study conducted an empirical analysis of the dynamic interactions between the yen/dollar exchange rate and Japanese exports with time series data from January 2001 to March 2023. Our findings reveal that yen exchange rate fluctuations impact exports in an asymmetrical manner. Firstly, a yen depreciation led to a notable increase in yen-denominated exports, but dollar-denominated export values remained largely unchanged. Secondly, the influence of the exchange rate on exports significantly decreased in the aftermath of the Great East Japan Earthquake. Lastly, even when a depreciation in the exchange rate results in an uptick in yen-denominated export values, it does not necessarily translate to a corresponding increase in export quantities—a trend more evident after the earthquake. This study further explores both micro and macro-level factors contributing to the subdued responsiveness of Japanese exports to exchange rate changes.

<Abstract>

 This paper examines changes in the labor market due to demographic changes and estimates the changes in the number of employed people by industry over the next 10 years using the Population Projection and the Regional Employment Survey. The results show that the number of people employed in the service sector is expected to increase, while the number of people employed in manufacturing is expected to decrease, especially in low-skilled manufacturing. In response to the long-term decline in the labor force, a policy to promote the employment of women aged 30-44, who have a high proportion of career breaks, is found to increase the number of high-skilled service workers by about 380,000 relative to baseline estimates. A policy to increase the number of older workers is expected to prevent the decline of workers in high-skilled manufacturing (from a decline of 40,000 to an increase of 30,000 relative to the baseline estimate) and increase employment in low-skilled services (by 680,000 relative to the baseline estimate).

<Abstract>

 This paper estimates the respective knowledge production functions considering population structure change, using time series data for the 1970-2019 period and panel data including the 2003-2021 period and spanning 30 industries. Using the time series data, R&D intensity makes a positive effect on the TFP growth rate, but the effect declines due to a decreasing trend in the ratio of productive population to elderly one. A reduction in the TFP differential between the U.S. and Korea and the TFP’s decreasing returns to scale both have negative effects on the TFP growth rate. When using the panel data, the R&D intensity positively affects the TFP growth rate, but a decreasing trend in the difference between productive population ratio and elderly one reduces the positive effect of R&D intensity. According to the estimation by industrial group, the R&D intensity of R&D intensive groups can have positive effects on the TFP growth rate. By the way, that of the high R&D intensive group shows very lower effect than that of the medium R&D intensive group and, moreover, loses its statistical significance differently from the medium R&D intensive one. As for the other service group, its R&D intensity plays an important role in absorbing the technological spillover from other industries.

<Abstract>

 We study the regime-dependent existence of unspanned macro risks in the Korean government bond market. To this end, we modify the arbitrage-free Nelson-Siegel model of Christensen, Diebold, and Rudebusch (2011) to make three candidate models. In the three models, unspanned macro risks affect the market prices of risks with (i) zero coefficients, (ii) regime-switching coefficients, and (iii) constant non-zero coefficients. Our Bayesian methodology compares them using monthly data of 13 bond maturities and two macro variables (the industrial production index growth rate and inflation). In our sample period of 2001 to 2022, the Bayesian methodology selects Case (ii). Our specification uses a two-state Markov chain, and the unspanned macro risks exist under regime-state two. However, their existence is not statistically significant under state one. During most of the period, the bond market is in regime-state one, but it remains in regime-state two from October 2008 to February 2009. Regarding term premium estimates, unspanned macro risks are also only present during the Global Financial Crisis.

Author: In Do Hwang(Bank of Korea)

<Abstract>

 Although an increasing number of studies demonstrate the importance of trust in economic growth, most of them only focus on interpersonal trust. This paper considers various types of trust including interpersonal trust (i.e., trust in most people), institutional trust (e.g., trust in the fair administration of justice, or trust in the protection of property rights), and political trust (e.g., trust in government or political parties), and investigates their impacts on growth. Using novel cross-country survey data, this paper finds that institutional trust is most robustly related to the economic growth in a cross-section of 46 countries. This paper also shows that there is a causal relationship between institutional trust and growth using panel data from those 46 countries. Hence, in contrast with the previous trust literature which focuses on trust in “people” as a “time-invariant cultural feature,” this paper stresses trust in the “social system” as an “institutions-dependent feature.”

Author: Junha Park (Bank of Korea), Dooyeon Cho (Sungkyunkwan University)

<Abstract>

 This study investigates how the pattern of demand-side secular stagnation changed in countries such as Korea, the US, and Japan before the COVID-19 pandemic. First, we analyze how the natural rate of interest is determined theoretically using the overlapping generations model with imperfect competition in a goods market and with liquidity constraints imposed on the household. A firm's mark-up rate plays a key role as a wedge between the natural rate of interest and the marginal product of capital. In particular, we find that with an additional condition, an increase in the mark-up ratio reduces the natural interest rate without affecting the marginal product of capital. Based on a theoretical analysis, we also empirically analyze whether a decline in natural interest rates in Korea, the US, and Japan is caused by capital accumulation or by an increase in the markup. The estimation results indicate that while natural interest rates in each country tend to fall and the marginal product of capital in Korea and Japan also declines in a trend, the marginal product of capital in the US shows a distinct pattern compared to the trend of declining natural interest rates. This implies that, unlike the case for Korea and Japan, the decline in the natural interest rate in the US appears to result from the markup rather than capital accumulation.

<Abstract>

 This paper examines which specific generation contributed to the pro-cyclicality of household consumption during the contraction phase following the Global Financial Crisis. Analyzing generation-specific household consumption is crucial because certain generations may inadvertently experience negative effects during business cycle fluctuations, as policies and other factors can affect all generations uniformly. The findings indicate that the pro-cyclicality of household consumption is primarily driven by a decline in spending among the MZ and pre-Baby Boom generations. These results suggest an increased likelihood of household consumption pro-cyclicality in future contraction phases. This is attributed to the potential decrease in income for the emerging dominant generation of consumer, the MZ generation, during contraction phases. As a result, there is a probability of household consumption slowdown, especially in selective consumer goods, leading to the pro-cyclicality of household consumption.

<Abstract>

  This study examines the impact of Korea's debtor-in-possession (DIP) system on the performance of distressed firms after 10 years of implementation. While the DIP system was introduced in Korea to encourage distressed firms to file for rehabilitation by guaranteeing management rights, there have been discussions on improving the system. The results show that DIP firms have a lower degree of earnings management than non-DIP firms, but there is no significant difference in financial performance. Overall, Korea’s DIP system and related policies may need to be revisited to ensure they achieve their goals.

<Abstract>

 This study analyzes the effect of school starting age on academic achievement from fourth grade to 12th grade, and how the effects change as students advance into higher grades. Since the actual school starting age is determined by an endogenous choice of the parents, such as early entry or postponement of entering school, we estimate the causal effect of school starting age on academic achievement using the mandatory school starting age determined by the school-entry cutoff date, and the date of birth as an instrument for the actual school starting age. The IV estimation results show that older students at school entry have higher test scores in Korean, math, and English in elementary and middle schools. The positive effects are observed even in high school. This study suggests that systems and policies are needed to help younger students learn and adapt to school.

<Abstract>

 Using Dahlquist and Pénasse's (2022) present value approach, this paper examines the predictive power of the Korea-U.S. interest rate differential and real exchange rate for the dollar-carry currency return on the Korean won (KRW). For comparison purposes, the currency portfolio of seven developed countries (G7 average) is also analyzed. First, the variance decomposition of the dollar-carry returns on the KRW and G7 average shows that the risk premium shock has a higher contribution than the interest rate differential shock. Second, the KRW temporarily devalues when the interest rate differential between Korea and the U.S. widens, but then gradually appreciates. Third, the predictive ability of the current level of real exchange rate for the future exchange rate is relatively higher than that of the G7 average.

<Abstract>

 I looked into the impact of the introduction of CBDC in Korea on the payment market variables like card fees and social welfare by extending the static model in Li, McAndrews, and Wang(2020). The optimal CBDC remuneration rate, the concept of benefits paid to the transaction volume, was estimated at 59bp which is equal to the transaction cost of cash for consumers. But the optimal rate can be changed by specific designs such as accessibility and protection of privacy. The introduction of CBDC can improve social welfare through two channels. The first direct channel is that they can provide consumers with a better means of payment than cash. The second indirect channel comes from the reduction of card fees and the price of trading goods due to the reaction of the card network to defend their business area from CBDC. The introduction of CBDC lowers the hurdle for card usage, which has a positive effect on financial inclusion but can widen inequality due to the regressive-transfer structure of the benefits.

<Abstract>

 In the digital transformation, central bank digital currency (CBDC) is to play the following essential roles in improving the stability and efficiency of the monetary system as well as stimulating innovation in the payment system. First, in the face of reduced cash use and reduced cash-related infrastructure such as ATM, CBDC can secure access to payment and settlement services for those highly dependent on cash by expanding infrastructure for digital fiat currency. Second, CBDC can not only promote competition and innovation but also contribute to user data and privacy protection by providing open payment service infrastructure under the increasing market dominance and data concentration following the entry of big tech into the payment service market. Third, amid the proliferation of private cryptocurrencies with high price volatility, CBDC can contribute to maintaining the reliability and soundness of the digital economy's monetary system by serving as a means of payment with public trust and a reserve asset for private cryptocurrencies. Finally, CBDC can reduce the digital divide across generations/regions and improve the efficiency of cross-border payment between countries.

<Abstract>

 In recent years, there has been a growing interest in how workers with a university education who were employed for the first time during a recession experienced continuous wage losses. Against this background, this study tries to examine the mechanisms by which wage losses persist among university graduates during a recession. As a result of this analysis, it was found that the continuity of the wage losses suffered by university graduates who take their first job during a recession was due to the field-of-study mismatch, that is, the mismatch between the workers' university major and the skills required at the workplace. Specifically, it was analyzed that about 70% of the wage losses caused by the recession are explained by the field-of-study mismatch.

<Abstract>

 The main purpose of this study is to understand and evaluate actual conditions in the North Korean economic system. In particular, the analysis focuses on trends and current levels after a period of economic hardship, but it approaches it from a perspective where it compares it with common experiences seen in socialist countries regarding economic reform.

 In order to overcome the chaos caused by the economic difficulties known as the “Arduous March” or the “March of Suffering” that occurred in the middle of the 1990s, North Korea implemented the “7.1 New Economic Management Policy” under Kim Jong-il and the “Our Style Economic Management Methods” under Kim Jong-un. In addition, the North Korean government has gradually modified its economic theories to justify and rationalize these reform policies, especially the introduction of market economic factors.

 In this regard, an evaluation by experts has concluded that North Korea’s level of economic reform has continued to rise every 10 years. As of the 2010s, it was found that the official system was in a transition phase between the improved plan and market socialism, and though it was actually in this transition phase, it was much closer to market socialism than to the improved plan.

 In addition, in the current economic system in North Korea both similarities and differences can be observed at the same time concerning phenomena that are normally displayed at various stages of economic reform in socialist nations. In the former case, it was emphasized that the contents of North Korean reforms are similar to those seen in other socialist states, especially in terms of the resource allocation mechanism that was shifting from a plan-oriented mechanism to a parallel “plan and market” mechanism. In the latter case, North Korea's peculiarity stands out because of its political aspects, as it has a third-generation hereditary succession process. The evaluation by experts highlighted the inequality of reform by sector, such as prices and ownership, and the nature of ex post facto approval for changes that had already occurred.

 In addition, the background to economic and financial difficulties is important for the formation of these plans and for market coexistence systems. However, the policy of "self-reliance" peculiar to North Korea is also a core factor that cannot be ignored. In particular, it is important that institutions, provinces, companies, individuals, and the government, which together form the five core economic actors of the “self-reliance” policy, share an interest in the progress of marketization. The current economic system, which was formed through 30 years of trial and error, and which has evolved since the economic crisis, has become a structural characteristic rather than a temporary one, and an irreversible characteristic, too.

<Abstract>

 The prediction of the short- and long-term stagflation probability has a profound influence on the Bank of Korea's preemptive monetary policy decision-making for economic and price stability. This study estimates the probability of stagflation in Korea over the next two years. To this end, a joint predictive distribution of the inflation rate and the real economic growth rate is generated using univariate and bivariate autoregressive distributed lag (ADL) models. In this process, the optimal prediction model is selected through Bayesian variable selection and precise tuning through out-of-sample prediction. As a result of long-term and short-term out-of-sample predictions for the last 5 years, the joint distribution predictive accuracy was maximized when each variable was independently predicted using the univariate ADL model in most forecasting horizons. As a result of the actual prediction using the optimal model, the probability of stagflation (GDP growth rate below 1% and CPI inflation rate above 4% or two consecutive quarters of decline in real GDP level and CPI inflation rate above 4%) temporarily increased in the fourth quarter of 2022 and then dropped significantly to less than 10%. From these results, it is predicted that the possibility of stagflation is very limited.

<Abstract>

 As economic uncertainty grows due to the COVID-19 pandemic, the need to quickly grasp the economic situation is growing. In order to understand the economic situation at an early stage, it is necessary to analyze high frequency data such as daily data rather than the existing monthly and quarterly data. In this study, based on the seasonal adjustment method of Ollech (2018), we prepared a seasonal adjustment method that can be applied to Korean daily data in consideration of national holidays and public holidays. Seasonal adjustments were made by applying this method to daily data of Korea, such as Electricity peak demand, Box office gross, Highway traffic, and Seoul subway ridership. Examining the seasonal adjustment results of the four daily data, it is judged that the seasonal adjustment was appropriate because the seasonally adjusted series was not significant in the seasonal frequency unlike the original series. The seasonally adjusted daily series is found to be more useful than the original series to quickly grasp changes in the economic situation after the COVID-19 pandemic. In the future, it is necessary for the Korean statistics authorities to prepare a pre-processing methodology suitable for Korean daily data by intensifying research on the seasonal adjustment of daily data.

<Abstract>

 By reducing uncertainty about future income or expenses, private insurance can reduce households’ precautionary saving and increase households’ consumption expenditures. This study examines the effects of private insurance using Korean Labor and Income Panel Study Data(2009~2019) and applying a variety of regression models on the panel data. The empirical analysis shows that insurance has a negative effect on saving, with the greatest effect for the lowest-income households. In addition, insurance is positively associated with consumption expenditures only for households with the lowest income and with the highest income.

<Abstract>

 As economic uncertainty increases due to the COVID-19 pandemic and climate change, indicators that can judge the economic situation in a timely manner are becoming more important. Although GDP growth is a representative indicator of the overall economic situation, there is a limit to quickly assessing the real-time economic situation due to publication lags and the low frequency nature. In this paper, we develop real- time GDP nowcasting system that updates the forecast every week. In this system, Long Short-Term Memory(LSTM), which is specialized in time series among deep learning algorithms, and Dynamic Factor Model(DFM) were complementarily used to enhance forecasting power.

 Both DFM and LSTM appropriately captured the actual economic situation. In particular, the rapid decline in the GDP growth rate in the 2020:Q1~Q2 due to the COVID-19 pandemic was detected early, and signs of a rebound in GDP growth in the 2020:Q3 was also quickly captured. In addition, the LSTM showed relatively high forecasting power in a situation where economic uncertainty has increased, such as the COVID-19 pandemic.

<Abstract>

This paper presents an agent-based model for assessing systemic risk of the Korean financial system. The model not only incorporates various systemic risk channels but also assumes that financial institutions which are subject to financial regulations show heterogeneous behaviors on their asset-liability portfolios. The model also encompasses five financial sectors with reflecting sector-specific features. This paper shows systemic risk levels and stress test results using the model and actual data on Korean financial sectors.

<Abstract>

This paper examines foreign liabilities of the non-financial corporate sector in Korea. Foreign liabilities of the non-financial corporate sector has increased steadily for last 20 year where the corporate bond issuance has been the main driver of the trend. Motivated by such trend, this paper investigates how the external financing costs affect FOREX market and business cycles in Korea. An empirical investigate suggest that the external financing costs leads exchange rate fluctuations and business cycles. In addition, the external financing costs possesses statistically significant information in forecasting exchange rate and business cycles. VAR analysis suggests that the adverse shocks to the external financing costs result in economic downturn along with the currency depreciation. Furthermore, the counter-factual analysis suggests that the exchange rate channel plays a non-trivial role in transmission of shocks to the external financing costs.

<Abstract>

Employing an SVAR model, we decompose house price changes in South Korea into three structural shocks: house supply shocks, actual residential demand shocks, and speculative demand shocks. We also calculate the impulse responses of house price to the aforementioned three structural shocks and relative contributions of the three structural shocks to house price changes. Our calculations show that actual residential demand shocks contribute the most, but speculative demand shocks also play a non-negligible role; the extent to which speculative demand shocks contribute to house price changes turns out to be more than 30%. The relative contribution of speculative demand shocks is bigger in Seoul metropolitan areas and for apartments, but smaller in rural areas and for non-apartments. The impulse response of house price to speculative demand shocks continues to be significant for more than two years in Seoul and six large metropolitan areas as well, but in rural areas the significance of impulse response vanishes within two years or less. The historical contribution of speculative demand shocks to house price changes appears to be strongly correlated with consumer sentiments for house prices.

<Abstract>

This paper analyzes the changes in financial reform during the Kim Jong-un era based on North Korean literature. We find that North Korea has systematically and functionally separated the central bank from commercial banks since the Kim Jong-un era began. In addition, enterprises have been allowed to withdraw cash from bank accounts and make inter-enterprise cash payments. In other words, nowadays non-cash currencies with passive money can partially serve as active money with purchasing power. With the systematic and functional separation of the central bank and the commercial bank, the issuance of the central bank changed to a money supply method through the commercial bank, and changes in the currency distribution structure have allowed commercial bank’s credit creation function to be implemented. This means that the banking system and the monetary?payment system of the socialist planned economy are changing in the way of the market economy. Reforms in the financial sector are believed to have been necessary to support changes in the economic system and to restore the function of the public financial sector. These changes have progressed in terms of the level of reform, but they are still considered similar to the period of the former Soviet Union's Perestroika or to the early period of China's reform and opening. Although North Korea’s financial reform is superior in terms of enacting the banking law, it is insufficient in terms of realizing the functions of commercial banks. In addition, it is assessed that institutional constraints such as maintaining a planned economy, and the lack of confidence in public finances limit the effectiveness and development of the financial system. It should be noted that these results are based on literature published in North Korea. In other words, there is a limit in the fact that such recent changes have been carried out on a trial basis in some areas, or have been carried out in a full-scale manner with a blueprint, since Kim Jong-un's inauguration.

<Abstract>

As the trade linkages and the financial relationship between China and Korea grow stronger, China’s influence on Korea is also growing larger. Therefore, it is meaningful to examine key features of Chinese monetary policy operations and the current situation, and to analyze the transmission mechanism of China’s monetary policy shocks onto the Korea economy. China’s monetary policy shocks can have an impact on the Korea economy through the trade, financial and oil-price channels. In the trade channel, an expansionary Chinese monetary policy can increase Korea’s exports of intermediate goods to China under the vertical trade structure, via the vertical trade integration effect. Meanwhile, the expenditure switching effect and the income demand effect show no statistical significance. In the financial and oil-price channels, expansionary Chinese monetary policy shocks can decrease the interest rate and increase both stock prices and the consumer price index in Korea through changes in global portfolio capital flows, interest rates, and raw material prices.

<Abstract>

The outlook for Korea's consumer price inflation rate has a profound impact not only on the Bank of Korea’s operation of the inflation target system but also on the overall economy, including the bond market and private consumption and investment. This study presents the prediction results of consumer price inflation in Korea for the next three years. To this end, first, model selection is performed based on the out-of-sample predictive power of autoregressive distributed lag (ADL) models, AR models, small-scale vector autoregressive (VAR) models, and  large-scale VAR models. Since there are many potential predictors of inflation, a Bayesian variable selection technique was introduced for 12 macro variables, and a precise tuning process was performed to improve predictive power. In the case of the VAR model, the Minnesota prior distribution was applied to solve the dimensional curse problem. Looking at the results of long-term and short-term out-of-sample predictions for the last five years, the ADL model was generally superior to other competing models in both point and distribution prediction. As a result of forecasting through the combination of predictions from the above models, the inflation rate is expected to maintain the current level of around 2% until the second half of 2022, and is expected to drop to around 1% from the first half of 2023.

<Abstract>

This study is to structurally examine the regional income disparity in Korea. It measures the regional income inducement by household consumption expenditure per unit income, and the regional interdependency of income using 2005 and 2015 Regional Input-Output Tables of 16 provincial regions of Korea. The results are as follows. Firstly, the income inducement by consumption expenditure per unit income decreased overall, mainly due to the decrease in the income inducement of other regions than due to that of their region. Secondly, in many regions, the inter-relational income dependency per unit income decreased also, this too, mainly due to the decrease in the income transfer to other region. And, the income inducement effects of consumption expenditure per unit income of Seoul and Gyeonggi, which occupy a large portion of the Korean economy, were lower than that of other regions, but took the largest portion of income inducements generated by other regions as well as by themselves and absorbed the income transfers from other regions the most. The higher income inducement and income absorption in Seoul and Gyeonggi by consumption expenditure of other regions were mainly because of the high share in service of their consumption structure, the progress in tertiarization of their industrial structure, and the high wage portion. These results also mean that viewed from the regional interdependency of income, the income of Seoul and that of Gyeonggi are highly dependent on the income of other regions. Especially, Gyeonggi which leads the overseas exports of high-tech based manufactured products, has other external factors that contribute to their high income inducement, whereas, Seoul which shows high income absorption using its inter-relations with other domestic regions based on the services, has an income-generating structure that is sensitive to other regions’ economic situation. Amid overall declines in regional income inducements and in income transfers, and continuing concentrations into Seoul and Gyeonggi regions, to alleviate the regional disparity, the regional industry policies should, rather than benchmarking the policies of the two concentrated regions, enhance their own inter-regional relationships by strengthening the comparative advantage of their regionally specialized industry.

<Abstract>

This study estimates the fiscal multiplier using Input-Output table panel data from year of 2010 to 2018. Considering the endogeneity of the government expenditure, this study uses the share of government expenditure by sector in the initial period as an instrument variable. The estimation from the panel fixed effect instrumental variables model shows that the estimate for the current period of government expenditure is 1.15∼1.22 and the estimate for the cumulative multiplier is 1.23∼ 1.32 depending on the method of controlling time trend. Since the general equilibrium effect absorbed by the time-fixed effect in the estimation equation, the estimated multiplier in this study may be different from the multiplier of the economy as a whole. The general equilibrium effect depends on the response of monetary policy, changes in tax policy, and interaction between sectors.

<Abstract>

This study empirically analyzes whether bank capital channel and risk-taking channel for monetary policy work for domestic banks in South Korea by analyzing the impact of the expansionary monetary policy on the rate spread between deposit and loan, capital ratio, and loan amount. For the empirical analysis, the Uhlig(2005)’s sign-restricted SVAR(Structural Vector Auto-Regression) model is used. The empirical results are as follows: the bank's interest rate margin increases, the capital ratio improves, risk-weighted asset ratio increases, and the amount of loans increases in response to expansionary monetary shock. This empirical results confirm that bank capital channel and risk-taking channel work in domestic banks, similar to the previous research results. The implications of this study are as follows. Although the expansionary monetary policy has the effect of improving the bank's financial soundness and profitability in the short term as bank capital channel works, it could negatively affect the soundness of banks by encouraging banks to pursue risk in the long run as risk-taking channel works. It is necessary to note that the capital ratio according to the BIS minimum capital requirement of individual banks may cause an illusion in supervising the soundness of the bank. So, the bank's aggressive lending expansion may lead to an inherent weakness in the event of a crisis. Since the financial authority may have an illusion about the bank’s financial soundness if the low interest rate persists, the authority needs to be actively interested in stress tests and concentration risk management in the pillar 2 of the BIS capital accord. In addition, since system risk may increase, it is necessary to conduct regular stress tests or preemptive monitoring of assets concentration risk.

<Abstract>

In this study, we present a methodology and model to estimate land prices and the value of land assets in North Korea in the absence of any data about land characteristics from North Korean authorities. Using this framework, we experimentally make market price-based estimates for land assets across the entire urban area of North Korea.  First, we estimate the determinants of land prices in South Korea using data on market prices of land from the late 1970s, when it was estimated that the income level gap between South Korea and North Korea wasn’t relatively large, and from the early 1980s, when urbanization levels in both of them were similar.  Second, we calculate land prices and their relative ratios for each city and urban area in North Korea around 2015 by substituting proxy variables of determinants of land prices derived through a geographic information analysis of North Korea into the function of land prices that we have already estimated.  Finally, we estimate the value of land assets in urban areas across North Korea by combining the ratio of housing transaction prices surveyed in several cities in North Korea with the relative prices estimated in this research.  As a result, land prices in urban areas in North Korea, looking at the relative ratio of price by city, are estimated to be the highest, at 100.00, in Tongdaewon district of Pyongyang, and to be the lowest, at 1.70, in Phungso county, Ryanggang Province. Meanwhile, the value of land assets in urbanized areas was estimated at $21.6 billion in 2015, which was 1.2 to 1.3 times the GDP of North Korea that year. This ratio is similar to South Korea's in the 1978-1980 period, when the South Korean economy grew at an average rate of 6%. Considering North Korea’s growth rate of about 1% in the 2013-2014 period, its ratio of land assets to GDP appears very high.

<Abstract>

Using the 2017 and 2019 Survey on Immigrants' Living Conditions and Labour Force, we examine how the job training programs in Korea affect immigrants’ labor market outcomes by applying the propensity score matching method. The results show that job training programs increase the probability of being employed by 6.4 percentage points and positively affect monthly wages. There is significant heterogeneity in the effects of job training effects across visa categories. For immigrants with work visas, the effect on the employment rate is relatively small, while the wage effect is considerably large. On the other hand, we do not find a positive wage effect for marriage migrants. Both the employment rate and the monthly wage increased through job training for permanent residents.

<Abstract>

Using an unobserved components model that features trend growth as a random walk, we find that GDP trend growth rates had gradually declined from the late 1980s to early 2010s in Korea. To uncover the underlying features of the slowdown, we use trend growth accounting. A major feature appears to be a significant decline in the growth rate of labor productivity. To be specific, the first gradual decline in trend growth, which started in 1988 and continued to 1998, is associated with a drop in TFP measured in labor-augmenting units. This finding is inconsistent with the hypothesis that the slowdown in GDP trend growth can be attributed to the 1997-1998 Korean financial crisis. Sluggish investment growth is behind the second period of the gradual slowdown, from 2002 to 2012.

<Abstract>

This study found an interesting fact that the nonlinear relationship structure between volatility and trading volume changed before and after the COVID-19 pandemic according to empirical analysis using Bitcoin (BTC) market data that sensitively reflects investors’ trading behavior. That is, their relationship appeared positive (+) in a stable market state before COVID-19 pandemic, as in theory based on the information flow paradigm. In a state under severe market stress due to COVID-19 pandemic, however, their dependence structure changed and even negative (-). This can be seen as a consequence of increased market stress caused by COVID-19 pandemics from a behavioral economics perspective, resulting in structural changes in the asset market and a significant impact on the nonlinear dependence of volatility and trading volume (in particular, their dependence at extreme quantiles). Hence, it should be recognized that in addition to information flows, psychological phenomena such as behavioral biases or herd behavior, which are closely related to market stress, can be a key in changing their dependence structure. For empirical analysis, this study performs a test of Ross (2015) for detecting a structural change, and proposes a Copula Regression Quantiles (CRQ) approach that can identify their nonlinear relationship structure and the asymmetric dependence in their distribution tails without the assumption of i.i.d. random variable. In addition, it was confirmed that when the relationship between their extreme values was analyzed by linear models, incorrect results could be derived due to model specification errors.
 

<Abstract>

This paper examines the potential impacts of COVID-19 on poverty in ASEAN countries. The first estimate, adopted from Summer et al. (2020) and Nonvide (2020), configures three scenarios of contractions in per capita household income or consumption; the impact of each scenario on poverty is calculated using poverty lines at different thresholds. In the second estimate, poverty impacts in 2020 and 2021 were projected using regression models controlling for unobserved country effects, unbalanced data, and endogeneity. COVID-19 has been shown to have negative impacts on poverty reduction in the ASEAN Member States. To reduce poverty, concerted efforts are needed to implement policies for reducing income inequality and promoting economic growth. Such efforts will not only speed up the countries’ return to pre-pandemic poverty levels but also contribute to further accelerating poverty reduction.
 

<Abstract>

Given the US dollar’s status as a global safe haven, global factors, such as US monetary policy, may have considerable impacts on financial markets in other countries. Regarding such hypothesis, this paper looked at the impacts of US monetary policy on domestic bond and FX swap markets through an event study. According to our analysis, US monetary policy had significant positive impacts on domestic interest rates. In particular, it turned out to have bigger impacts on long-term products with high term premiums. By period, the correlation between US monetary policy and domestic interest rates was not significant before the financial crisis, but was clearly positive after the crisis. The US conventional monetary policy was seen to have big impacts on short-term and medium-term KTB yields, while its unconventional monetary policy had major impacts on long-term KTB yields. Moreover, FX swap rates reacted very sensitively to US monetary policy shocks before the financial crisis, while they did not show any significant reactions after the crisis. This suggests that, in line with the covered interest rate parity, the impact of US monetary policy shocks was transmitted to domestic financial markets mainly through swap rate adjustments before the global financial crisis, but through the changes in domestic interest rates during the post-crisis period. 

<Abstract>

We empirically investigate the determinants of a firm’s exit from exporting, using Korean manufacturing firm-level data for the period from 2006 to 2014. Specifically, we estimate the effects of not only firm-level and industry-level characteristics, but also macroeconomic variables on the probability that a firm stops exporting by applying a Complementary Log-Log Model analysis. The results of our estimation suggest that firm-level heterogeneity, such as workforce size, capital intensity, intangible assets and foreign ownership, industry-level variation, such as the labor displacement rate, and macroeconomic variables, such as domestic demand and world demand, significantly affect the possibility of a firm ceasing exports. Also, we show that market interest rates increase the possibility of an export cessation and that the effects of market interest rates are more pronounced on firms with a higher debt ratio. In the primary exporting industries, the probability of a firm ceasing exports decreases as productivity at the firm rises.

Typical business cycle models have difficulties in explaining key macroeconomic labor market variables, such as employment and unemployment, as they usually consider labor hour choices only. In this paper, we introduce labor market search and matching frictions into a New Keynesian nominal rigidity model and estimate it by Bayesian methods to examine the dynamics of the key labor market variables and business cycles in Korea. The results show that unemployment rates are largely explained by technology shocks, which affect the labor demand side, as well as labor supply shocks. In addition, wage bargaining shocks originating from the bargaining process between firms and workers have non-negligible negative effects on output and employment growth, and careful measures need to be taken to limit their adverse effects.

<Abstract>

In this research, we explore the effects of changes in industrial structure due to industrial restructuring on employment and growth in the Korean economy. To that end, we first investigate the impact of industrial restructuring on employment through Lilien’s sectoral shift hypothesis, considering the dependence of industrial restructuring on business cycles. As a result of the analysis, we find that changes in the industrial structure have exerted a short-term effect of increasing unemployment, and that the effects of industrial restructuring are even greater during the economic downturn period. In light of these points, Lilien’s sectoral shift hypothesis seems to be valid in Korea. Next, we examine the effect of industrial restructuring on economic growth in Korea by analyzing which one, between the Kuznetz hypothesis and the Baumol effect, is dominant. Empirical results reveal that the mid- to long-term effect of industrial restructuring on GDP growth is significant, which is in accordance with the Kuznets hypothesis, where resource allocation along with industrial restructuring to sectors with high productivity spurs economic growth.

<Abstract>

The Bank of Korea began its operation on June 12, 1950, with the Bank of Korea Act established a month or so earlier. Thus was first introduced to Korea modern central banking in the real sense of the word. The Bloomfield Mission, consisting of A. Bloomfield and J. Jensen of the Federal Reserve Bank of New York, spent about six months drafting a bill, which finally became the Bank of Korea Act. Little has been known yet about the process leading to the creation of the Mission and the historical context surrounding it, except that F. Tamagna of the Federal Reserve Board made in his capacity of the ECA’s representative the offer of technical assistance to the Korean government. This paper attempts to dig deeper into relevant historical records and literature to fill these gaps. As it happened, the confrontation between the US and the USSR was accelerating towards the end of 1940s. The paper’s new findings include that the Bloomfield Mission was, together with the ECA Mission to Korea, a product of the then US foreign policy (Cold War policy) and that the former Mission’s technical assistance was conceived and provided all along as part of the inflation stabilization program pursued by the latter Mission. The Bloomfield Mission was after all a historical necessity. Next, the paper examines the changes added to the bill during its journey to becoming the Bank of Korea Act enacted in May 1950, presenting a review of the Act. The paper further evaluates the Act in terms of legal persistence, finding that the revised Act currently in force still substantially resembles the Act enacted 70 years ago from now. Finally in order is a brief discussion on those factors which seem to have contributed much to such persistence and thus apparent excellence of the Act enacted.

<Abstract>

Using data from the Household Income and Expenditure Survey over the period 1994-2016, we estimate the coefficient of relative prudence in order to capture precautionary saving motive. To do this, we adopt a cohort approach, where we transform such microdata into sample cohort means. Together with initial income involving liquidity constraint, we estimate the relative prudence derived from the Euler equation. The two-stage least-squares (2SLS) between estimate of it obtained from the cohort panel data analysis is too small for the existence of precautionary saving motive, as in previous studies, while the 2SLS random effects estimate is so reasonable. Moreover, the liquidity-constrained cohorts tend to be more sensitive to uncertainty, relative to the unconstrained ones.

<Abstract>

This paper surveys research since the 1990s on the ability of the yield spread and its components (i.e., expectation spread and term premium components) for future economic activity, and also conducts an empirical analysis of their forecasting ability using the yield data of Korean government bonds. This paper’s survey, particularly for the US, shows that the yield spread has significant predictive power for some macroeconomic variables, but since the mid-1980s, its predictive power seems to have declined, possibly due to stronger inflation targeting. Next, this paper’s empirical analysis using Korean data indicates that the yield spread, and the term premium component in particular, has significant predictive power for industrial production (IP) growth, consumer price index growth, and the IP gap. An out-of-sample analysis shows that the prediction equations are unstable over time, and that in predicting IP growth, the yield spread decomposition makes a significant contribution to the prediction of IP growth.

<Abstract>

This study investigates the relationship between mineral exports to China, North Korea’s most important source of foreign currency acquisition, and its imports of various items from China from the first quarter of 1995 through to the third quarter of 2019. The results from a cointegration analysis suggest that there exists a long-run equilibrium relationship between mineral exports and imports of food, fuel, and some intermediate goods, such as industrial supplies, parts, and accessories. The results from a vector autoregression using first-differenced variables indicate that the short-run relationship between mineral exportsand imports is different between the period before and after the third quarter of 2010. Prior to structural changes, i.e., before the third quarter of 2010, import shocks affected mineral exports. However, after the third quarter of 2010, an increase in mineral exports led to an increase in the import of vehicles, intermediate goods, and luxury goods. This paper shows both the possibilities and the limits that mineral exports can contribute to North Korea’s economic growth. The results, which show that mineral exports have a long-run relationship with intermediate goods, such as industrial supplies, parts and accessories, imply that mineral exports to China could have a positive effect on the North Korean economy. However, the fact that mineral exports do not have any significant effect on the import of machinery and equipment, which helps the accumulation of capital formation, shows that mineral exports have a limited effect on inducing long-term growth in the North Korean economy.

<Abstract>

This paper aims to derive macroeconomic implications by analyzing the business cycle characteristics of the youth unemployment. The results of empirical analysis seem to show that youth unemployment appears to be relatively less correlated with business cycle compared to other age groups, and thus it is difficult to explain the recent steady increase in the potential labor force as a result of the business cycle fluctuation alone. Moreover, the alternative unemployment measures of the youth group showing upward trend were estimated to be co-integrated with output measures. This co-integrated trend increase suggests that unlike other age groups, youth may be influenced by structural factors inherent in Korea's economic growth path. The fact that the wage difference based on firm size has widened steadily since the Asian financial crisis and that the proportion of large companies that provide relatively high-quality jobs compared to major industrialized countries is significantly lower may be the evidence of the structural changes in Korean youth labor market. The results of above analysis may explain why the job search periods for youth has lengthened amid these structural changes. 

<Abstract>

This paper studies, from a quantity theory of money perspective, the reasons that North Korean inflation and exchange rates maintain stability while its economy is experiencing difficulties due to the international community’s economic sanctions. In doing so, this paper uses both domestic and foreign currencies in an analytic model based on the quantity theory of money to cautiously reflect North Korea’s dollarization as well as its management of its exchange rate. In particular, foreign currency holdings are divided into those for store-of-value purposes and those for transaction purposes. This paper shows that in the early stages, in which the amount of foreign currency holdings for store-of-value purposes is decreasing while the amount of foreign currency holdings for transaction purposes is intact, inflation and exchange rates both exhibit stable movements. In the middle stages, where the amount of foreign currency holdings for transaction purposes begins to fall, exchange rates show some increase and inflation decreases. In the final stages, when the amount of foreign currency holdings for transaction purposes significantly decreases, exchange rates and inflation both increase, and in some situations a crisis can happen. According to this paper’s analysis, if the economic sanctions continue to the extent that the amount of North Korean foreign currency holdings for transaction purposes starts to fall, the exchange rate and inflation stability we see now are unlikely to be maintained.

<Abstract>

Since the mid-1990s, Korea has been aging rapidly. At the same time, real interest rates have declined sharply. This paper studies whether population aging has contributed to the real interest rate decrease in Korea. We first present empirical evidence that increases in life expectancy and the old-age-dependency ratio, and a fall in population growth, i.e., the population aging, decrease real interest rates. Then we calibrate a life-cycle model to capture the features of the old-age-dependency ratio and population growth in Korea, and show that population aging accounts for about one third of the fall in real interest rates between 1995 and 2018. Furthermore, according to simulation results, increased life expectancy is more important than decreased population growth in affecting the real interest rate decrease during the period.

<Abstract>

A central bank infers market expectations of future yields based on yield curves. The central bank needs to precisely understand the changes in market expectations of future yields in order to have a more effective monetary policy. This need explains why a range of models have attempted to produce yield curves and market expectations that are as accurate as possible. Alongside the development of bond markets, the interconnectedness between them and macroeconomic factors has deepened, and this has rendered understanding of what macroeconomic variables affect yield curves even more important. However, the existence of various theories about determinants of yields inevitably means that previous studies have applied different macroeconomics variables when estimating yield curves. This indicates model uncertainties and naturally poses a question: Which model better estimates yield curves? Put differently, which variables should be applied to better estimate yield curves? This study employs the Dynamic Nelson-Siegel Model and takes the Bayesian approach to variable selection in order to ensure precision in estimating yield curves and market expectations of future yields. Bayesian variable selection may be an effective estimation method because it is expected to alleviate problems arising from a priori selection of the key variables comprising a model, and because it is a comprehensive approach that efficiently reflects model uncertainties in estimations. A comparison of Bayesian variable selection with the models of previous studies finds that the question of which macroeconomic variables are applied to a model has considerable impact on market expectations of future yields. This shows that model uncertainties exert great influence on the resultant estimates, and that it is reasonable to reflect model uncertainties in the estimation. Those implications are underscored by the superior forecasting performance of Bayesian variable selection models over those models used in previous studies. Therefore, the use of a Bayesian variable selection model is advisable in estimating yield curves and market expectations of yield curves with greater exactitude in consideration of the impact of model uncertainties on the estimation..

<Abstract>

This paper examines two different reunification regimes and investigates the decision making problems on tax and income transfers in a political economy model. The first reunification regime is the South-Driven regime under which the majority of South Korea choose the tax rate, the amount of transfers and the size of migration. The second is the North-Participation regime under which there is no limit on migration and the majority of Unified Korea choose the tax rate and the amount of transfers. In both regimes, Northern residents’ migration decisions are endogenous and those who decide not to migrate to the Southern region have an alternative to declare fiscal independence of income redistribution taking place within the North independently. This paper shows that there is no income redistribution in a politico-economic equilibrium under the South-Driven regime. Given that, those remaining in the Northern region decide to declare fiscal independence. On the other hand, the North-Participation regime delivers an equilibrium supporting income redistribution and no fiscal independence.

<Abstract>

Recent discussions about a minimum wage increase (MWI) and its influence on the economy have mainly focused on the quantitative aspects, such as labor costs and employment. However, concerning the qualitative aspects, an MWI could have positive effects by enhancing firm productivity and crowding out marginal firms from the market. These positive effects of an MWI can offset, to some extent, its potential negative effects – increasing labor costs and decreasing employment, among others. In this regard we empirically examine the impact of an MWI on firm productivity (total factor productivity). Using firm level panel data from the manufacturing industry in Korea, we calculate the influence rates of a minimum wage by sector and by firm size (number of workers), and analyze its effects on firm productivity. In particular, the production functions of the firms are estimated by taking into account endogeneity among the input factors, in order to resolve the drawbacks of existing studies – underestimating the capital factor coefficient and overestimating the labor factor coefficient. This study finds that the influences of an MWI on wages, employment, and productivity are substantially different across sectors and firm sizes. While an MWI has shown to have positive influences on productivity growth in the manufacturing industry as a whole, each sector demonstrates a different direction of effect, and the degree of productivity change also varies by sector. The impacts of an MWI on firm productivity are generally estimated to be more negative for smaller firms, but in some sectors the effects are found to be positive. In addition, the wage increases resulting from an MWI seem to cause a productivity enhancement across all sectors in the manufacturing industry. The policy implications of this study are as follows. Considering the empirical findings that an MWI causes an increase in productivity in many sectors of the manufacturing industry, it would be desirable to take into consideration not only the negative side effects but also the positive effects of an MWI when designing any future minimum wage policy. Moreover, in spite of there being a uniform minimum wage, this study finds that the diverse influence rates of a minimum wage across firms have different impacts on wages, employment, and productivity across sectors or firm size. This finding could be conducive to discussions about differentiation among minimum wage schemes by sector or firm size.

<Abstract>

This paper analyzes the determining factors in the unemployment rate among young people in their 20s by studying data from 30 OECD countries between 2000 and 2017. It identifies reasons why Korea has a higher youth unemployment rate than Japan, and assesses what implications Japan’s youth unemployment measures could have on Korea. The study highlights the variables that have meaningful impacts on youth unemployment. They include the unemployment rate among the working-age population, the percentage of each age bracket in the overall population, the GDP growth rate, the percentage of wage laborers in each age group, the percentage of elderly people, and the percentage of part-time workers. This paper also finds that a decline in the youth population, especially among people in their 20s, does not help to address the issue of youth unemployment. Secondly, this paper explains the additional factors behind Korea’s higher youth unemployment rates. One is Korea’s disadvantageous employment environment, compared to that in Japan, in terms of wage earnings. Other factors include the existence of fewer decent corporate jobs than in Japan, and wide disparities in wages between large and small corporate jobs. Therefore, while making efforts to resolve long-term and structural problems, it is necessary to actively promote policy measures to solve short-term mismatch problems of youth employment by referring to Japanese policy examples.

<Abstract>

This paper studies localization effects of knowledge spillovers in Korea using U.S. patents granted over the period 1996-2015. The “sample-matching” analysis initiated by Jaffe, Trajtenberg, and Henderson (1993) is adopted. We do not find evidence of positive localization effects in Korea. In particular, controlling for the existing geographic distribution of knowledge production, the frequency of domestic citations of Korean patents is no more than the citation frequency from overseas, and the difference is decreasing within the sample period. We also examine localization effects across regions and industries, and compare Korea with Taiwan and Japan.

<Abstract>

This study examines the labor market performance of graduates who had student loans. Compared to earlier studies, we extended analyses to all jobs that were experienced for more than 18 months after graduation. First, we found that students who had student loans earned 2.81% less at their first job compared to their counterparts without student loans. Second, the wage gap decreased over time, a reduction of 0.66%p due to labor market turnovers. Third, when we compared cumulated labor income, however, the amount for borrowers were continuously higher. This is because the job searching period of a borrower was shorter, despite relatively lower wages at the first job, and borrowers also made more frequent job turnovers, accompanying relatively more wage increases. These results suggest that the negative effects of college loans on earnings, reported in previous studies, may have exaggerated the negative impact to some extent of having loans. However, when we look at the quality of jobs beyond simply wages, the proportion of borrowers working at large companies as regular workers was consistently low. Given that job conditions at the earlier stages of one’s career may lead to gaps over time, our findings call for more systematic investigations into the effects that student loans have on long-term labor performance.

<Abstact>

In this study, I analyzed the effects of government spending on macro variables and on each industry by using a factor augmented vector autoregressive model (FAVAR) and 167 macro-variables in Korea since 2000. The results reveal that the effects of two types of government spending ― government consumption and government investment ― greatly differ, therefore it is better to consider the two types of spending separately for a more precise analysis. The stimulus effects of government consumption are clear, but those of government investment are not. In addition, the crowding-out effects of government spending take place through the current account deficit channel rather than the traditional crowding-out channel, reducing private consumption and investment. Both types of government spending show a positive effect on the construction industry. Also, an increase in government consumption stimulates output in various manufacturing and service sectors.

<Abstract>

Using a stochastic volatility-in-mean VAR model consisting of the KOSPI index, the foreign exchange rate, the government bond rate, and the credit spread, this study investigates the effects of financial market uncertainty on financial markets. We find that higher uncertainty has recessionary effects on financial markets. The effects are especially stronger in equity markets and in won-dollar exchange markets. We also find that the effects of uncertainty become stronger during times of financial market stress compared to normal times. Finally, the results imply that financial market uncertainty may potentially affect the real sector, too.

<Abstract>

This paper analyzes the effects of trade on demand for labor of trading firms in Korea. We apply system GMM methodology to estimate the effects of imports and exports on employment of Korean manufacturing firms using firm-level data from the Survey of Business Activities of Statistics Korea between 2006 and 2014. According to our estimated results, for firms with high-productivity, exports have a positive and significant effect on the labor demand, while other firms do not show any such significant effects. Furthermore, our results show that offshoring mitigates the positive effects of exports on employment, since tasks within the firms can be relocated abroad. On the other hand, an increase in imports reduces demand for labor because labor is replaced with low-priced imported inputs. Also, when firms partake in global outsourcing, the negative effects of imports are mitigated as those firms expand their production by enhancing their efficiency in the process of offshoring. Therefore, our results suggest that it is important to consider heterogeneous firm productivity as well as offshoring in analyzing the effect of trade on labor demand of firms.

<Abstract>

This paper examines the impact of a dual labor market structure on labor productivity using unbalanced panel data from 29 OECD member countries between 1990 and 2015. By applying a variety of regression models on the panel data (e.g., a pooled regression, a fixed effects model and a GMM), we explore how changes in worker-type composition among temporary, permanent and self-employed workers contribute to productivity growth. While it appears that our results differ slightly, depending on the econometric models, overall an increase in the share of permanent workers leads to a relatively higher increase in productivity growth. On the other hand, it is also seen that the effects of the share of temporary workers on labor productivity are considerably lower than that of permanent and self-employed workers. To sum it up, our findings indicate that an increase in temporary workers could have an adverse effect on labor productivity.

<Abstract>

  We use a time-varying parameter vector auto regression (TVP-VAR) model to understand the impact of U.S. monetary policy normalization on Korean financial markets and capital accounts. The U.S. monetary policy is represented by the federal funds rate, term premium and credit spread. During the U.S. monetary contraction period of 2004 to 2006, changes in the federal funds rate presented negative pressure on Korean financial markets. The changes in federal funds rate also led to a simultaneous contraction in inward and outward capital flows. However, the effects of a federal funds rate shock has been reduced since 2015. On the other hand, the effects of U.S. term premiums is getting stronger after the period of quantitative easing (QE). The influence of the U.S. credit spread also significantly increased after the global financial crisis. Simulation results show that a rise in the U.S. credit spread, which can be triggered by a contractionary monetary policy, can pose a larger adverse impact on the Korean economy than a rise in the federal funds rate itself. As for capital flows, a U.S. monetary policy contraction causes an outflow of foreign investment, but the repatriation of overseas investment by Korean residents can offset this outflow.

<Abstract>

  Initially entering into the job market during hard times with unfavorable market institutions has a persistent, negative effect on young workers’ subsequent employment. This paper analyzes hysteresis in youth unemployment by using a composite fixed-effect panel data model. Data sets for the age-cohort unemployment rate and for labor market institutions are constructed from OECD statistics from 21 advanced economies, including Korea, from 1985 to 2017, and are then readjusted to match with the peculiarities of the Korean market. In Korea, with a less-aggressive stance on active labor market policy spending, a male worker who experiences a one percentage point higher youth unemployment rate when he was 20- to 29-years-old has a 0.146 percentage point higher unemployment rate at the ages of 30-to 34-years-old and a 0.035 percentage point higher unemployment rate at the age of 35- to 39-years-old. These figures are larger than those in most countries that have more aggressive spending schemes. These findings point out that hysteresis in the Korean labor market can be mitigated by expanding active labor market policy spending more aggressively and more effectively.

<Abstract>

  The purpose of this study is to analyze quantitatively and qualitatively the effects of the increase in online shopping and its effects on real-world commercial outlets. The empirical analysis of this study is based on the results of “Census on Establishments” and “Online Shopping Survey” that cover 15 years, from 2002 to 2016. According to the results of this study, the increase in the number of online transactions affects the decrease in the number of stores in the real-world retail sector. However, non-specialized large stores and chain convenience stores showed an increase in the number of stores. In addition, the number of F&B stores increased the most in line with the increase in online transactions. This is because the increase in online transactions and in internet users led to the use of more delivery applications and the introduction of popular places on blogs or through social media. Street-level rents for medium and large-sized locations increased. In other words, it is seen that the demand for differentiated real-world stores that provide a good user experience increases, even though online transactions also increase. These results suggest that real-world stores should provide good user experiences in their physical locations with a certain size and assortment of goods.

<Abstact>

  This paper examines monetary policy quantitatively in a two-agent and small-scale New-Keynesian economy with debt-constrained households that cannot smooth their consumption intertemporally and frictionlessly since highly indebted households are not allowed to borrow above a certain debt ceiling in incomplete financial markets without additional risk premiums due to information asymmetry between savers and borrowers.
  We find that, in the event of cost shocks, the asymmetric responses of borrowing households without, and saving households with, dividend incomes lead to different labor supplies and consumptions over heterogeneous households, and eventually to an extension of the monetary policy transmission channels. The income effect and low elasticity of the labor supply play key roles in such asymmetric responses over heterogeneous households. We also find that the social welfare in a flexible inflation targeting (FIT) monetary policy, in which both the inflation gap and the output gap are considered in an integrated manner when policy-making, is similar to that of the Ramsey optimal monetary policy (ROP), in which the shares of debt-constrained households, as well as all economic states, including both the inflation gap and output gap, are considered comprehensively for policy-making, and that it is greater than that of simple inflation targeting (SIT) monetary policy, in which only the inflation gap is considered mechanically for policy-making. Such social welfare implies that a FIT policy may still work even in an economy with a sizable number of debt-constrained households. Further, the responses of cost shocks to consumption and labor supply are dying out more slowly under FIT and ROP policies than under an SIT policy.

<Abstract>

  As the Korean economy grew, employment expanded steadily, with the number of economically active people increasing and the employment-to-population rate also increasing. However, the working age population started to decline in 2017, and the employment of women and young people has been sluggish. The proportion of non-salaried workers in Korea is much higher than in other OECD countries, and is also excessive, considering Korea’s income levels. In addition, the proportion of non-regular workers and the proportion of workers employed at small companies are particularly high among salaried workers.

  In light of these characteristics of Korean employment, the urgent problems facing the employment structure can be summarized by the deepening dual structure of the labor market, the increase in youth unemployment, sluggish female employment figures, and an excessive share of self-employment.

  Overall, it is seen that labor market duality is the main structural factor of the employment problems in Korea. Therefore, in order to fundamentally address this employment problem, it is necessary to concentrate policy efforts on alleviating labor market duality.

           Kyung Kuen Kim (Bank of Korea)

<Abstact>

This paper investigates the effects on Korean exports of demand in developed economies, and how these effects have changed since the global financial crisis. As a measure of import demand, we use import intensity-adjusted demand to take into account heterogenous import intensities across components of aggregate demand. Our estimation of a dynamic panel regression model reveals that Korea’s exports to the G7 countries were elastic with respect to the import demand of these countries until the global financial crisis, but have shifted to become inelastic since. Furthermore, we separately estimate the effects of the different components of the G7 countries’ aggregate demand (private consumption, public consumption, investment and exports). The results show that the decrease in private consumption in the G7 countries during the crisis had a significant impact in causing the decline in Korea’s exports to them, but that the increase in their public consumption since the crisis has had a significant effect on driving increased Korean exports to them. The effects of the G7 countries’ exports on Korea’s exports to them  remain positive and significant during both the pre- and post-crisis periods. The effects of the G7 countries’ investments on Korea’s exports are also positive and significant, but the positive effect has weakened since the crisis. Our findings suggest that the overall effect of changes in the G7 countries’ import demand on Korea’s exports to them has weakened compared to the pre-crisis period.

<Abstact>

This paper examines the economic factors that are related to the dynamics of the variance risk premium, and specially, which economic factors are related to the forecasting power of the variance premium regarding future index returns. Eleven general economic variables, eight interest rate variables, and eleven sentiment-associated variables are used to figure out the relevant economic variables that affect the variance risk premium. According to our empirical results, the won-dollar exchange rates, foreign reserves, the historical/implied volatility, and interest rate variables all have significant coefficients. The highest adjusted R-squared is more than 65 percent, indicating their significant explanatory power of the variance risk premium. Next, to verify the economic variables associated with the predictability of the variance risk premium, we conduct forecasting regressions to predict future stock returns and volatilities for one to six months. Our empirical analysis shows that only the won-dollar exchange rate, among the many variables associated with the dynamics of the variance risk premium, has a significant forecasting ability regarding future index returns. These results are consistent with results found in previous studies, including Londono (2012) and Bollerslev et al.(2014), which show that the variance risk premium is related to global risk factors.

            Janghee Cho (Jeju National Univ.)

<Abstract>

This study shows the effects of the old dependency ratio on the age structure and performance of establishments in a region. Using county-level (si-gun-gu in Korea) data constructed from the 2015 Economic Census and 2015 Population and Housing Census, we find a county with higher old dependency ratio has a higher fraction of old establishments and lower number of jobs and sales per worker. The robustness checks using an alternative age variable and subsample produce qualitatively similar results. The result suggests that the local ageing population is negatively related to the dynamics of the local economy as well as its scale and performance.

<Abstract>

This paper analyzes the determinants of Korean residential investment by dividing it into demand and supply using instrumental variable regressions. It turned out that housing prices reflecting demand pressure were the most important determinants of residential investment during the whole sample period (1988q1-2017q3). We add public supply of residential areas as an important policy variable. The effect of the public supply of housing sites on residential investment was large enough to reach about 80 percent of the impact of housing prices.

The importance of demand and supply factors has varied significantly over the analysis period. Demand factor reflected in housing prices accounted for the major variations of residential investment in the preceding period (1988q1-2005q4), while supply factors such as construction costs, and public supply of residential areas were more significant in the later period (2006q1-2017q3). This result is additionally supported by the fact that correlation between residential investment and the relative price of residential investment turns into negative from positive in the latter phase.

            Yoon, Young Man (Incheon National Univ.)

<Abstract>

This paper examines whether the risk-taking channel of monetary policy works in Korea. In order to empirically analyze, we use the panel data set which consists of data from financial statements of 17 Korean domestic banks and macro indicators such as interest rates and growth rate over the period from the first quarter of 2003 to the second quarter of 2015. The estimation results show that there is a consistent and significant inverse relationship between proxy variables of monetary policy stance and bank risk. This confirms that the risk-taking channel of monetary policy transmission exists in Korea. We find that the effect of monetary policy through the risk-taking channel is influenced by the number of consecutive quarters when the interest rate is below the benchmark interest rate and the level of nominal interest rate. The effect of an expansionary monetary policy on increasing bank’s risk-taking is alleviated as the period of relatively low interest rate is extended. And the effect of monetary policy on bank risk is smaller as the level of nominal interest rate is lower. It is also found that balance sheet channel and bank lending channel among other transmission channels of monetary policy could influence on bank risk. In terms of implications for monetary policy, empirical results suggest that the central bank should take the effect of monetary policy on bank risk-taking behavior into consideration ex-ante and also need to be more concerned with ex-post monitoring.

            Seung Whan Ryuk (BOK)

<Abstract>

In order to confirm whether the monetary policy affect corporate investment or not, this paper examines the validity of the asset price channel and the balance sheet channel among monetary policy transmission mechanisms. Unbalanced dynamic panel model based on system GMM method is employed and annual financial statements data of Korean firms from 2000 to 2016 are used. For estimating the asset price channel, Tobin’s q is used as the independent variable, and for estimating the balance sheet channel, the cross products of liquidity asset ratio and call rate difference or liquidity asset ratio and rate of increase in monetary base are used as interaction independent variables. In addition, debt ratio and operating profit ratio are included as the regressors. The dependent variable is investment ratio (the ratio of real investment amount to real tangible fixed asset amount).

The empirical test results show that there is a statistically significant relation between investment at t and Tobin’s Q at t-1. Considering lowering policy rate possibly increase stock price, and then stock price has a positive relation with Tobin’s Q, the plus signal of Tobin’s Q means that the asset price channel of monetary policy functions statistically significant.

The coefficient of liquidity asset ratio at the former period (t-1) is also estimated as plus – it means that there might be information asymmetry between firms and banks.

Meanwhile, the coefficient of interaction term which is the cross product of liquidity asset ratio and call rate difference is estimated plus and the one which is the cross products of liquidity asset ratio and rate of increase in monetary base is estimated minus. This means that the impact of liquidity asset on investment gets weaker during the time of easing monetary policy; therefore, the balance sheet channel of monetary policy function is statistically significant.

Model estimation by firm size distribution shows that the impacts of the asset price channel and the balance sheet channel are stronger in the smaller firms. Besides, the impact of operating profit on investment is estimated more powerful in the smaller firms rather than in the larger firms. On the contrary, only the debt ratio coefficient of top 50% sized-firm group shows statistically significant minus sign.

This study has policy implications in the aspects of firms’ investment during the time of tightening monetary policy, and external fund premium for smaller firms.

<Abstract>

  In this paper, we investigate the so called 'consumption puzzle' that the volatility of consumption relative to income is higher in emerging countries than in the developed countries from the viewpoint of two well-known theories that permanent shock mainly contributes to this phenomenon or transitory shock can almost explain the fluctuation of consumption. In order to conduct investigation, we estimated a small open economy RBC DSGE model using Korean and Mexican data and analyzed the estimated results through the methods of variance decomposition, impulse response and simulation. We found that it is hard to say that the excessive consumption volatility of all the emerging countries are affected by the same source in that each exogenous shock’s role varies by countries. While in Mexico transitory shock combined with financial friction induces the excess consumption volatility, in Korea permanent shock does. Especially in Korea permanent shock combined with financial friction can explain not only the excessive consumption volatility but also the change of interest rate, which is clearly different result from the previous studies.

<Abstract>

  This paper focuses upon estimating the long-run relationship among industrial total factor productivity(TFP), research and development(R&D) stock and TFP of other industries based on domestic intermediate input or demand structure, using the data of 30 industries and the period of 1998-2016. According to the estimation results, the TFP of other industries makes significant and positive effects on the TFP of individual industries through intermediate input or demand spillover channel. Meanwhile, based on the estimation results of manufacturing, service and other industries, when the TFP(R&D stock) of 30 industries increase by 1%(10%) respectively, the TFP growth of whole industry enlarges by 1.34%(1.08%) through intermediate supply and demand channel. 

<Abstract>

  This paper purports to scrutinize the evolving trends of major technologies that have shaped the world’s technology frontier, and at the same time, measure relative standings of major industrial nations in their innovative capacity in production of those technologies. We consider all (over 5 million) utility patents granted by the US Patent and Trademark Office (USPTO) over the period of 1976-2015. In analysis, we find the continued dominance of US, the steady performance of Japan, the signs of European decline, and the emergence of new economies that include Korea, Taiwan and Israel. By considering the most popular technologies per each decade, we observe a clear pattern in the evolution of world economic structure, most notably, the IT revolution. Interestingly, it is precisely in these IT-related technologies in which Korea have performed especially well. In the fastest growing technologies of the most recent decade, however, Korea’s performance thus far bucks this rosy trend. Korea’s innovative capacity is not as evenly distributed across all technologies as other advanced nations. US, Japan, Europe, and other Western economies, as well as Israel, all exhibit solid and steady performance in all our rankings.

<Abstract>

  When it comes to explaining the relationship between inventory investment and business fluctuations, the production smoothing theory and the stock-out avoidance theory take contradictory stances. Decision-making related to inventory investments of corporations is thought to be influenced by both motives, but the relative sizes or directions of their respective influences can differ depending upon the phase of the business cycle. Against this backdrop, this paper differs from existing studies in that it theoretically tests the relative significances of the production smoothing and stock-out avoidance motives in the inventory investment dynamics, while placing its analytical focus on determining the existence and patterns of the asymmetric dynamics of  inventory investment over the business cycle phases. To this end this paper sets up a non-linear model that is expanded from the existing linear inventory investment model, and checks whether its predictive power is better than that of the existing model. 

  The results of analysis confirm the nature of the asymmetric dynamics of  inventory investment over the business cycle phases. A stock-out avoidance motive appears but there is no significant production smoothing motive in boom times. In downturns, in contrast, the stock-out avoidance motive is insignificant, but a quality of asymmetric dynamics  in which changes in inventory cause the deepening of recessions, due to the non-convexity of production costs proposed by Ramey (1991), is detected. This paper confirms that a model considering the asymmetric dynamics of  inventory investment can have better predictive power than one that does not consider it, through within-sample and out-of-sample predictions and various predictive power tests.

  These research results are expected to be useful for economic forecasting, through their enhancement of the understandings of the inventory investment dynamics and of the nature of its business cycle destabilization. 

<Abstract>

According to the portfolio rebalancing model of Hau and Rey (2004; 2006), portfolio equity flows of international investors are one of key variables which determine the relationship between stock prices and exchange rate. Equity flows not only directly affect both stock prices and exchange rate, but also serve as a transmission channel of shocks between the two variables. This paper analyzes the structural relationships between Korea-US equity flows, Korea stock prices, USD/KRW exchange rate and US stock prices over the period from January 2000 to December 2016, using the structural VAR model. We employ the identification method through heteroscedasticity to allow for contemporaneous bidirectional causalities between the variables included in the model. Based on the impulse response analysis, we find that Korea-US equity flows, Korea stock prices and USD/KRW exchange rate have significant contemporaneous and/or lagged effects on each other and generally have the strongest effects in the month when shocks occur. As a whole, the signs of estimated impulse responses, except for the accumulated response of Korea stock prices to a shock in USD/KRW exchange rate, show the patterns consistent with the predictions of the portfolio rebalancing model during the sample period.

<Abstract>

This paper analyzes the impact of negative policy interest rate (NPIR) on bank profitability. In particular, we analyze the impact on its profitability after adding the gap cost to the Monti-Klein(1971)’s bank profit function reflecting the change in interest rates in the inter-bank market, the deposit market, and the loan market, which are important paths in monetary policy transmission. As a result of the theoretical model analysis, bank profitability improves when the inter-bank market interest rate is negative (-) due to the negative policy interest rate (NPIR) and all the interest rates fall. However, this is in conflict with the conventional belief that banks' profitability will deteriorate due to the NPIR. To resolve the contradiction, we also set up a case where the deposit interest rate is downwardly rigid. It is then found that the overall profitability of the banks may deteriorate as the deterioration of the profitability of the deposit portion dominates. It also appears that this phenomenon is intensified as the number of competing banks increases, or as the size of the gap increases. Finally, if the profitability of the bank deteriorates due to both downward rigidity of the deposit rate and the limitation on the expansion of loan amount, we suggest that negative interest rate policy(NIRP) should be conducted only in exceptional circumstance.

<Abstract>

In Input-output model, an employment multiplier is established for the first time to analyze an employment linkage relations and the opportunity cost of employment among industries. A supply multiplier is constructed by endogenizing profit into the model and the multiplier is transformed into an employment multiplier. In the empirical analysis, the average employment inducement effect of the service sector is lower than that of manufacturing industry, but considering the cost of employment, the private consumer service and the producer service sectors show greater the employment inducement effect than those of manufacturing sector. Other characteristics of employment linkage structures are that, first, the whole sale and retail industry great influence on the induced employment; second, manufacturing sector generates more employment in the service sector than that in the manufacturing sector; third, the service sector has an greater impacts on the employment in the service sector than that in the manufacturing sector.

<Abstract>

This paper examines the effects of various training programs on employment rate of college graduates. Training programs for youth in Korea are conducted by several types of providers, and are thus likely to generate heterogeneous effects. Using the Graduate Occupational Mobility Survey (2009-2013), we estimate the effects of job training on employability by applying a Generalized Propensity Score Matching method. The results confirm heterogeneous treatment effects among training types ? while no effects are found with respect to training by private providers, there exist statistically significant effects of training by both public and college providers.

This study establishes the stylized facts on economic inequality using KLIPS (Korean Labor & Income Panel Study) of 2001-2015 and presents empirical evidence on their macroeconomic implications. Firstly, we find that inequalities of after-tax disposable income and consumption have not increased in 2000s, contradicting public belief. However, dispersion of household debt by income group has steadily widened in 2000s as high-income group leads a run-up of household debt while low-income group faces more limited access to financial markets. Secondly, in addition to the widening debt dispersion, usages of debt are very different depending on income levels. Using fixed effects panel regressions and panel VARs, we find that high-income group tends to borrow in order to invest in real estate assets or buy houses even with reducing non-housing consumption. Meanwhile, low-income group seems to borrow for consumption, not for investment. Based on our finding, we discuss the role of widening debt dispersion in terms of macroeconomic instability and persistent economic inequality.

<Abstract>

This paper studies the effect of the cash receipt system on preventing tax evasion by analyzing consumers’ behavior about the income tax deduction for cash receipt. The estimation results show that consumers ask self-employed to issue the cash receipt by 340∼1,160 thousand KRW in order to reduce their effective income tax rate by 0.1%p which is defined by the ratio of labor income tax to yearly wage. This result can be interpreted as a supportive evidence that the cash receipt system is effectively working in preventing tax evasion of the self-employed.