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December 2008, The 2008 KDI-KAEA Conference
Enhancing Productivity and Sustaining Growth-
Chapter 1-1Linkages Between Exchange Rate Policy and Macroeconomic Performance
From a panel of 137 countries over the years 1971 to 2002, we find evidence that an exchange rate policy of ‘fear of floating’ is associated with superior macroeconomic performance in non-industrialized countries. We examine four different measures of performance-per capita GDP growth, ii) the CPT inflation rate, iii) GDP growth volatility, and iv) inflation volatility and how they respond to a ‘words versus deeds’ measure of exchange-rate policy obtained by interacting a country’s de jure exchange rate policy with its de facto policy as codified by Rogoff and Reinhart (2004). For non-industrialized countries, the highest GDP growth rates are associated with those who pursue fear of floating (de jure float and de facto fix) whereas the lowest inflation rates are achieved by countries that pursue a matched fix (de jure and de facto fixing). Countries that pursued fear of floating also experienced the lowest GDP and inflation volatility while those that pursued a matched de jure and de facto float experienced the greatest macroeconomic instability.
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Chapter 1-2Threshold Cointegration and the Monetary Model of Exchange Rates
The long-run validity of the monetary model of nominal exchange rates has been an issue in the literature. Although the existence of a cointegrating relationship among the fundamental variables is the backbone of the monetary model, the empirical results often fail to show evidence of cointegration among the fundamental variables in the model. These results cast doubt on the monetary model of nominal exchange rates see Rapach and Wohar (2002, Journal of International Economics). In this paper, we examine the long-run validity of the monetary model by taking into account of nonlinear behavior. Nonlinearities in exchange rate dynamics might arise, for example, if reaction to fundamentals and adjustment depends on the magnitude or sign of the deviation from a long-run equilibrium. To our surprise, no previous works have tested the validity of their nonlinear model with for nonlinear cointegration. Thus, we advance the literature by performing formal tests for nonlinear cointegration with two different threshold specifications. We model these different regimes by including threshold effects that depend on the size of the level and first-difference in the error-correction term, where the threshold value is endogenously determined for each country. To perform our tests, we utilize quarterly data from eighteen countries over the time period 1973-1997. Overall, in spite of allowing for nonlinear threshold effects, we find evidence that the monetary model has a stable long-run equilibrium in only three to six of the eighteen countries.
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Chapter 1-3Global Dispersion of Current Accounts: Is the Universe Expanding?
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Chapter 2-1The Contribution Of Rising School Quality To U.S. Economic Growth
This paper explores how much U.S. labor quality has increased due to rising school spending. Given a drastic increase in the U.S. public school spending per pupil during the 20th century, accounting only for the increases in mean years of schooling of the workforce may miss out on a significant part of labor quality growth. In order to estimate the impact of rising school spending on labor quality growth, I examine how earnings of younger cohorts compare to those of older cohorts, beyond the estimated Mincer return to schooling. My findings are that rising school spending is about half as important as increases in mean years of schooling for U.S. labor quality growth, and that labor quality growth explains about one quarter of the growth in labor productivity between 1967 and 2000. The growth in human capital of the workforce due to rising school spending explains only a quarter of the increases in empirical returns to schooling, and a rising skill premium explains the rest. Controlling for the rise in skill premium is importantﾖfailing to do so would double the estimated importance of the increased expenditure to growth in human capital.
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Chapter 2-2R&D Investment and Job Creation in Korea
If technical progresses are of a form that can be utilized by existing plant, then investors will be encouraged to create new plants. This is called \"capitalization effect\". However, if the technical progress is very fast, the proportion of workers released from production unit will be high. This is called \"creative destruction effect\".(Aghion and Howitt, 1998) We tested some propositions of Schumpeterian growth theory by real data of Korean economy. Considering the results of estimation and testing, we can see that the evidence is strongly in favor of the capitalization effect of growth on unemployment in Korean economy. But, we can see the decreasing trend of those capitalization effect by detecting the increase of creative destruction effect of growth. Finally, recent \"jobless growth\" may come from the nonexistence of capitalization effect of productivity growth.
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Chapter 3-1Corporate Governance and Liquidity
We investigate the empirical relation between corporate governance and stock market liquidity. We find that firms with better corporate governance have narrower spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. In addition, w e show that changes in our liquidity measures are significantly related to changes in the governance index over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate informational asymmetries. Our results are remarkably robust to alternative model specifications, across exchanges, and different measures of liquidity.
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Chapter 3-2Foreign Investors and Corporate Governance in Korea
This paper has two aims. The first aim is to investigate whether poor corporate governance negatively affects equity participation of foreign investors. The second aim is to investigate whether firm-level efforts for better corporate governance attract more foreign investments. Our regression results suggest foreign equity ownership is negatively associated with firms’ ownership concentration but is positively associated with firms’ efforts for better corporate governance. Interestingly, foreign investors show different behavioral patterns from their domestic counterparts, as the latter group shows less sensitivity to the corporate governance issue than the former group.
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Chapter 3-3Economic Crisis, Learning and Innovation in Korean Firms
Korean firms(chaebols) faced increasing global competition as Korea became a member of the WTO and OECD, and the world economy continued to globalize. These changes led to economic crisis in Korea and the crises caused Korean firms to transform. This paper investigates factors that contributed to the economic crisis and Korean firms’ learning and innovations in response to the crisis. Some Korean firms’ financial resource selection and deployment were ill-prepared for the changes these firms were dissolved as the economic environment drastically changed. Other Korean firms learned the importance of multiple factors: managers’ awareness and adaptabilities to changes in market conditions, corporate core competency and capability, managers’ investment decision, and principles of corporate management. Many Korean firms increased competitiveness by making changes in their competitive mind set and adopting new business practices after the economic crisis. Emphasis on competence-creation and globalization, the most prevalent changes, made Korean firms competitive.
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Chapter 4-1Analysis of Pay Inequality and its Impacts on Growth and Performance in Korean Industry
This paper examines the relationship among pay inequality, economic growth and innovation in Korea. We estimate pay inequality in Korea’s manufacturing sector using panel-level data for the period 1993 to 2003. The objective is to estimate pay inequality by using Theil’s index and to identify the factors determining pay inequality and find the relationship with economic growth and innovation. We first review changes in industrial trend, production, and investment patterns over the period and how those changes led to the creation of a relative pay inequality between and within regions and sectors. We then compare the annual changes in manufacturing pay inequality and annual GDP growth, finding that the previously stable and negative relationship predicted by Kuznets broke down at the height of the period of structural reform in Korea, giving way to a positive relationship after 1998. On the basis of Theil’s T statistics, results show a positive relationship between firms’ pay inequality and size, location, R&D, export and business sectors. The relation holds even when we control for individual, time period and firm characteristics. The decomposability property of the Theil index enables us to show that manufacturing pay inequality in Korea has risen both across sectors and regions, though more strongly across industrial sectors. Despite controlling for changes in the level of real per capita income, the rise in inequality accelerates in the period following the introduction of reforms. It appears that a large part of rising pay inequality can be attributed to rising relative pay in the ICT sector. The findings support the hypothesis of an \"augmented\" Kuznets Curve according to which some developed countries are found on an upward-sloping addendum to Kuznets’original formulation.
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Chapter 4-2Measuring Living Standard from the Lowest: Height of the Haengryu Deceased in Colonial Korea
Living standard of Korean during the colonial period (1910-1945) has been debated for a long time. We explored this problem using the height of the male Haengryu deceased, who died without any acquaintances. We found that the height of male Haengryu deceased aged 20 to 30 increased by 2.4㎝ from 1913/5 to 1943/5. This result is consistent with recent quantitative studies measuring income level or demographic information.
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Chapter 4-3Socioeconomic determinants of health in North Korea
North Korea has survived the breakdown of the communist bloc and has been immune to the democratization process of the 1990s. In spite of national famines and economic collapse, the totalitarian regime in Pyongyang maintains a firm grip. Reliable information on the population’s biosocial welfare is scarce. Using height and weight data of 5991 North Korean pre-school children, we investigate socioeconomic determinants of height-for-age (HAZ), weight-for-age (WAZ) and weight-for-height (WHZ) z-scores as an indicator for public health. W e find a statistically significant impact of the age of the child and mother, as well as the sex of the child on HAZ and WAZ. In contrast, social status and wealth proxies at the individual and household level are not statistically significant. We do not find a consistent effect for geographic regions or for rural-urban residents. Yet, urban provinces seem to be better-off. Most importantly, we find that children living in families who benefit from food aid of the United Nations are more healthy in terms of HAZ, WAZ and WHZ than those depending on the government. Hence, further delivery of United Nations food aid is likely to mitigate the effects of the ongoing food crisis in North Korea.
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Chapter 5-1International Linkages of the Korean Macroeconomy: The Global VAR Modelling Approach
The recent development of global vector autoregressive (GVAR) modelling by Pesaran, Schuermann and Weiner (2004) and Dees, di Mauro, Pesaran and Smith (2007) represents an accessible way of incorporating country–specific models into a global framework which overcomes the typical dimensional problems associated with such large scale models. Using 33 countries (26 regions), w e extend the model in a number of significant directions. W e explicitly account for the trade balance by including real exports and imports, extend the sample period over 1980Q2-2006Q4, and allow for the presence of structural breaks. Focussing on a number of impulse response functions related to current headline events, we find that the impacts of each shock on six focus economies (Korea, the US, the Eurozone, China, Japan and the UK) are mostlyconsistent with our prior expectations. Furthermore, by focusing on the single and joint probabilities of achieving an inflation target, maintaining acceptable growth and a number of current account scenarios, we provide a great deal of interesting information of relevance to policy decisions.
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Chapter 5-2GMM Estimation of Hybrid Phillips Curve: A Source of Conflicting Empirical Results
The New Keynesian Phillips Curve or its hybrid version are commonly estimated by the instrumental variable method. Instrumental variables are usually selected from a large number of valid instruments on an ad hoc basis. It has been recognized in the literature that the estimates are sensitive to the choice of instrumental variables and to the choice of the measurement of inflation. Such a sensitivity is reflected in the debates in recent literature on the relative role of forward-looking behavior and on the role of marginal cost as the driving force. This paper uses the L2 -boosting method that selects the optimal instruments from a large number of valid instruments. The base for the boosting can be the observed variables, or the ordinary and generalized principal components of the valid instruments. When the optimal set of instruments boosted from the principal components is used, all conflicting conclusions in previous studies vanish. Regardless of the choice of inflation measure and estimation equation, we find the dominant role of forward-looking behavior in inflation dynamics, and the significant effect of the real marginal cost on inflation.
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Chapter 5-3House Prices and Monetary Policy: A Dynamic Factor Model for Korea
This paper investigates the relative importance of national, regional, and city- specific factors on explaining the movement of housing prices across Korean cities. For this purpose, I employ a dynamic factor model using the Bayesian approach proposed by Otrok and Whiteman (1998) to measure the contribution of each factor. The variance decomposition analysis illustrates that most of the movement of Korean housing prices are ascribed to the national factor which accounts for 56% of housing price variations on average and over 70% in 5 cities including Seoul and Pusan. This demonstrates the existence of the comovement of housing prices in Korean cities, which has been discussed in both academics and real estate industry without providing any solid evidence so far. This paper also finds that the contribution of city-specific factors range from 20% to 70%. However, the regional factors have negligible impacts on housing price fluctuations in all cities. I also study the effects of monetary policy shocks on national-level housing prices measured by the national factor. For this purpose, I use a structural VAR model to disentangle the structural monetary shocks. Based on this, I conduct a counterfactual exercise which restricts the structural monetary shocks equal to zero after 2003. This experiment finds that the effects of monetary policy shocks on national-level housing prices are trivial. This finding reveals that the hike in housing prices observed in recent periods are mostly likely attributable to macro fundamentals rather than mitigating structural monetary shocks.
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