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July 2005, The 2005 KDI-KAEA Conference
Korea’s Corporate Environment and Sustainable Development Strategy-
Chapter 1-1Foreign Exchange Rate and Stock Price
In financial crises, it is widely observed that stock prices and exchange rates tend to crash at the same time. Is it possible to identify the cause and effect? This paper tests the empirical significance of causal relations between foreign exchange rates and stock prices, using daily data for Korea (1990-2004) and the U.S (1995-2004). The empirical results are mixed, varying with the period of observation and the lag order of the model. For Korea, bidirectional causality is significant only during the crisis period (1997-2001). For the post-crisis period (2001-2004), the evidence tends to support the stock-market cause theory. For the U.S., the Granger causality test also tends to support the stock-marketcause theory.
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Chapter 1-2Economic Fundamentals on Exchange Rates under Different Exchange Rate Regimes: Recent Experiences from the Korean Exchange Rate Regime Change
This paper examines the macroeconomic structural differences of the free floating exchange rate regime and the managed float exchange rate regime focusing on the Korean economy. Korea has shifted her exchange rate regime from the managed float to the free floating after the 1997 economic crisis. It is well documented that the exchange rate is very difficult to predict using any theoretical models for the exchange rate determination. Korean exchange rates provide one of the unique opportunities to study the different behaviors or roles, if any, of managed float and free floating exchange rate regimes. Based on the simple monetary model, we found that the Korean exchange rates are more sensitive to the economic fundamentals under the free floating regime than under the managed float regime. Exchange rate pass-through into domestic variables, especially inflation rate, has become more direct and statistically significant under the floating regime than under the managed regime. This finding is consistent with the views that the managed (or fixed) regime provides the domestic price stability necessary for the economic growth for the developing countries. Exchange rate volatilities under the flexible regime could be reduced with the development of wellfunctioning currency futures market.
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Chapter 1-3Effects of Stock Attributes, Market Structure, and Tick Size on the Speed of Spread and Depth Adjustment
Liquidity providers on the NYSE make faster quote adjustments toward equilibrium spreads and depths than they do on NASDAQ. Both NYSE specialists and NASDAQ dealers make faster spread and depth adjustments for stocks with more frequent trading, greater return volatility, higher prices, smaller market capitalizations, and smaller trade sizes. We find that stocks with greater information-based trading and in more competitive trading environments exhibit faster quote adjustments toward equilibrium spreads and depths. The speed of quote adjustment is faster after decimalization in both markets. These results are robust and not driven by differences in stock attributes between the two markets or time periods. We interpret these results as evidence that segmented dealer markets and large tick sizes slow liquidity providers’ quote adjustments to new information.
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Chapter 2-1Financial Reform, Institutional Interdependency and Supervisory Failure in the Post-Crisis Korea
In the aftermath of the economic crisis of 1997-98 South Korea undertook a number of reforms in financial supervision. In spite of the reforms doubts have been raised as to whether Korea has in fact succeeded in creating a system of financial supervision capable of dealing with certain risk and responding to new challenges appropriately. This paper examines Korea’s recent experience of financial instability resulting from misconduct by credit-card companies as a case in point and argues that the post-crisis reform in financial supervision was limited to changing formal institutions for financial supervision and further reforms will have to be undertaken in other related institutions if Korea is to improve financial supervision.
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Chapter 2-2Reforming the Fiscal Management System in Korea
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Chapter 2-3Economic and Financial Integration in East Asia and Necessary Regulatory Reform for a Financial Hub in Korea
The purpose of this paper is to examine the extent of economic and financial integration occurring in East Asia and discuss necessary regulatory reform for Korea to become a Northeast Asian financial hub. Increasing economic integration in East Asia over the last two decades has been evidenced by consistent growth in intra-regional trade and intra-regional investment. Greater economic integration in the region, accompanied by financial deregulation and liberalization, has contributed to greater financial integration. This study confirms increasing degree of financial market integration in East Asia by comparing movements of monthly money market rates before and after the Asian financial crisis. Convergence of interest rates across the countries in East Asia is examined by analyzing deviations, correlation coefficients and multivariate cointegration tests of interest rates. Given increased financial integration in East Asia, the Korean government’s plan to create a Northeast Asian financial hub in Korea is not a fantasy, but an achievable dream. However, the Korean government needs to improve its financial structure and financial institutions and carry out various regulatory reforms. First, transforming existing sector-based laws and regulations into function-based legal and regulatory systems is a pre-requisite. Second, necessary measures to ensure transparency of corporate governance and market transactions are needed to encourage capital inflows. Third, further deregulation of foreign exchange transactions by both domestic residents and foreigners is desired.
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Chapter 2-4Safeguarding Economic Cooperation, Reform, and Development on the Korean Peninsula
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Chapter 3-1Bank-based and Market-based Financial Systems: Time-series Evidence
In this paper, we reexamine the relative merits of bank-based and market-based financial systems in promoting long-run economic growth, which has been debated since the 19th century. Recent empirical studies based on cross-sectional analyses have failed to find strong evidence in favor of either a bank-based view or a market-based view. Instead, they find evidence in favor of either financial services or law and finance views. Given the paucity of rigorous time-series analyses of the issue, we reexamine the issue by using time-series analyses. We find that in the U.S., the U.K., and Japan, the stock market played an important role in financing economic growth, whereas the banking sector played a more important role in Germany, France, and Korea. A more detailed subsample analysis shows that for all countries, the banking sector played an important role in the early years of economic growth. Regarding the causal relation between financial systems and economic growth, except for Korea, all countries show that the financial system leads economic growth. A further analysis shows that the banking sector and the stock market in each country were complementary to each other in each country in the process of economic growth except for the U.S., where the two sectors were mildly substitutable. Our findings suggest, among other things, that recent cross-country studies may provide a limited picture of the debate on the relative merits of bank-based and marketbased financial systems.
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Chapter 3-2Looking for Evidence of Relationship Lending in Korea: Competitiveness in Local Banks’ in SME Loan Market
This paper examines recent SME lending data from Korean banks of different size and category to see if small local banks are likely to have comparative advantages in relationship lending to informationally opaque SMEs. We find some evidences for relationship lending by small banks in loan premium charged by banks and much stronger evidences for relationship lending by small banks in (original) loan maturity and the use of collateral to dictate comparative advantage of small banks in relationship banking. These results indicate that small banks enjoy quite strong competitive edges in SME loan market in Korea. Our study also suggest only a relatively minor competitive effect the Basel II on local banks primarily because the large nation-wide banks that are likely to adopt Internal Ratings-Based approach tend to make different types of SME loans to different types of borrowers than local banks.
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Chapter 4-1Shareholder Protection Laws and Corporate Boards : Evidence from Europe
Country-specific factors might have greater explanatory power than firm-specific factors in explaining corporate board structure. In particular, when a country’s minority shareholder laws are strong, then minority shareholders should have more power to affect board structure. In empirical tests, we find that European firms in countries with stronger shareholder protection laws have (i) more independent directors.
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Chapter 4-2Corporate Distress and Restructuring Policy of Korea SMEs : Role of Credit Guarantee Scheme
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Chapter 5-1Sources of SME Innovations in the Globalization Era
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Chapter 5-2What Motivates Startup Firms When Innovations are Sequential?
We present a dynamic analysis of the interaction between incumbent firms and successful new entrepreneurs, that can provide R&D incentives when innovations are cumulative/sequential. We argue that the insights of the basic model extend to varying market structures and regulatory environments.
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Chapter 5-3The China Impact and Korean Manufacturing Industries: Experiences of SMEs
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Chapter 6-1Global Competition and Productivity Growth: Evidence from Korean Manufacturing Micro-data
The dynamism of Asian NIEs’ (Newly Industrializing Economies) export-oriented growth paths has drawn substantial attention from researchers. But, empirical studies based on longitudinal micro-data in Asia are still rare, mainly due to the lack of readily available data. Based on the plant-level raw data underlying the Annual Report on Mining and Manufacturing Survey of Korea (1990-98), this study explores links between exporting and productivity. Main findings of the paper suggest that productivity gains associated with exporting tend to have strong intra-industry spillovers.
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Chapter 6-2Growth Accounting for Some Selected Developing, Newly Industrialized and Developed Nations from 1966-2000: A Data Envelopment Analysis
We work out technical efficiency levels of 29 countries consisting of some selected South Asian, East Asian and EU countries using data envelopment analysis. Luxembourg has an efficiency score of one(most efficient) in all the years .Netherlands also has an efficiency score of one in 1966,1971,1976 and 1981.Japan,UK,Belgium,Ireland,Indonesia,Spain and Germany has an efficiency score of one in at least one of the years from 1966 to 2000.In the year 2000 though mean efficiency levels(without including life expectancy as input) of South Asian countries is higher than the European Union Countries and East Asian countries. Japan has the highest average efficiency followed by Hong Kong in the East Asian region in the period 1966-2000. We also decompose labor productivity growth into components attributable to technological changes (shifts in the overall production frontier), technological catch up or efficiency changes(movement towards or away from the frontier),capital accumulation(movement along the frontier) and human capital accumulation( proxied by life expectancy).The overall production frontier is constructed using deterministic methods requiring no specification of functional form for the technology nor any assumption about market structure or the absence of market imperfections. Growth accounting results tend to convey that for the East Asian and the South Asian countries efficiency changes(technological catch up) have contributed the most, while for the European countries it is the technical changes which has contributed more to labour productivity changes between 1966-2000. We also analyze the evolution of cross country distribution for the 29 countries included in our sample using Kernel densities. It seems that there are other factors like trade openness,quality of governments,population rate of growth, savings rate, corruption perception indices, rule of law index, social capital and trust variables, formal and informal rules governing the society, among others, rather than the ones that are included below for the growth accounting exercise which may be responsible for productivity accounting on point to point basis. For all the seven periods(point to point basis) we see a major role played by technological changes and efficiency changes together to account for the current period counterfactual distributions and for the bimodal distribution in year 2000, and for the period 1966-2000(not point to point basis –an excercise done similar to Kumar and Russell(2002)) we find technical changes and its combination with other tripartite and quadripartite changes jointly account for the bimodal distribution in year 2000.However, from this growth accounting exercise, we do find that there is convergence in statistical terms of efficiency changes and human capital accumulation across countries of the EU, South Asian and East Asian regions.
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