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August 2015, 2015 KDI Journal of Economic Policy Conference
Recent Issues in Economics and Economic Policies-
Chapter 1How Competitive and Stable is the Commercial Banking Industry in China after Bank Reforms?
The Chinese banking system has come a long way, from a mono bank system before Deung Xiao Ping’s 1978 economic reform to creation of four state-owned commercial banks and policy banks as well as second tier (or joint-equity) banks in the 1980s and then establishment of city commercial banks by local governments in the 1990s. The financial liberalization in the 1990s prior to its entry to World Trade Organization focused on bank reforms which include market-based interest rate reform as well as equal treatment of foreign banks. With entry of more banks, the Chinese commercial banking industry experienced continually decreasing market concentration. This paper examines market concentration and its effect on competition in the Chinese commercial banking market for the period of 1992-2008. This study also investigates how changes in competition have affected financial stability of the Chinese commercial banks. To test the competitive conditions, we obtained the H statistic of the Panza-Rosse model from the revenue function equation, where three major input costs, labor expenses, capital costs and funding costs are used to estimate the revenue. Both total revenue and interest revenue are alternatively used. The financial stability is estimated by the Z-score formula. The Chinese banking industry has become increasingly less concentrated market with an increase in the number of banks, which can be attributable to financial liberalization and deregulation, creation of joint equity commercial banks and establishment of city banks by local governments. This study finds that along with decreased market concentration, competition in the Chinese banking industry has improved moderately. However, its market structure is far from a competitive market, as evidenced by small H statistic values. The Chinese banking industry is still highly concentrated and its level of competition is closer to oligopoly. It seems that bank reforms have a small effect on competitiveness of Chinese commercial banking. This study also finds that while the higher degree of market concentration may have negative effect on financial stability of the entire banking system, an individual bank’s ability to earn higher markup or charge higher net interest margin contributes to financial soundness of the individual bank.
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Chapter 2Credit Cycle and Balancing Capital Gap: Evidence from Korea
This paper studies balancing capital gap due to credit cycles using data from nationwide and regional banks in Korea. Specifically, banks’ target capital ratios(TCRs) are estimated and compared with the data to identify capital gaps, and the responses to the gaps are then analyzed using a panel model. The empirical results show that, in the long-run, the capital ratio rises as the credit to gross domestic product (Credit/GDP) gap increases, and the expansion of the Credit/GDP gap impairs banks’ asset management capabilities by reducing the capital gap with a higher capital target ratio. Additionally, the changes in the capital gap impact banks’ asset compositions and management behaviors. A decrease in the capital gap lowers the growth rate of the total assets, risk-weighted assets (RWA), and loan obligations, but increases the growth rate of core capital relative to risky assets. These results indicate that the growth in RWA is highly sensitive to changes in capital gap compared to other balance sheet variables. Similar results are shown in various cases that use non-core liabilities to synthesize predictor variables for credit cycles.
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Chapter 3Government Spending Shocks and Private Activity: The Role of Sentiments
This paper studies the dynamic effects of the fiscal policy shock on private activity using an array of vector autoregressive models for the post-war US data. We are particularly interested in the role of consumer sentiment in the transmission of the government spending shock. Our major findings are as follows. Private consumption and investment fail to rise persistently in response to positive spending shocks especially when shocks are anticipated, while they exhibit persistent and significant increases when the sentiment shock occurs. Employment and real wages in the private sector also respond significantly positively only to the sentiment shock. Consumer sentiment responds negatively to a positive fiscal shock, resulting in subsequent decreases in private activity. That is, our empirical findings imply that the government spending shock generates consumer pessimism, which then weakens the effectiveness of the fiscal policy.
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Chapter 4Analysis of the Structural Change in Household Debt Distribution by Age of Householder in Korea and the US
This paper analyzes how and why household debt distribution by householder's age has changed over the past decade both in Korea and the US. Data shows that the proportion of household debt held by younger households has decreased, while that held by older households has increased. Empirical analysis shows that the change in householder's demographic distribution is the main driving force that has shifted household debt distribution. Since demographic aging is an inevitable trend, the proportion of household debt held by senior households is also expected to increase. Therefore, the Korean government must preemptively prepare for the household debt problem especially that held by older households by strengthening macro-prudential policies, preventing asset price deflation, restructuring household debt contract structures, and reforming labor market inflexibility.
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Chapter 5Labor Share Decline and the Capitalization of Intellectual Property Products
We study the behavior of the US labor share over the past 65 years using new data from the post-2013 revision of the national income and product accounts and the fixed assets tables capitalizing intellectual property products (IPP). We find that IPP capital entirely explains the observed decline of the US labor share, which otherwise is secularly constant over the past 65 years for structures and equipment capital. The labor share decline simply reflects the fact that the US economy is undergoing a transition toward a larger IPP sector.
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Chapter 6Interindustry Wage Differentials, Technology Adoption, and Job Polarization
Using data on the U.S., we find that high-wage industries in 1980 experienced (1) more evident job polarization and (2) higher growth rate of information and communication technology (ICT) capital per worker between 1980 and 2009. These findings are consistent with the hypothesis that firms optimally respond to interindustry wage differentials, which (at least partly) arise from exogenous factors at the firm level. As the relative price of ICT capital declines, the persistent structure of interindustry wage differentials pushes high-wage industries to replace routine workers with ICT capital more intensively than low-wage industries. As a result, those industries exhibit slower employment growth of routine workers than low-wage industries, which led to heterogeneity in job polarization across industries.
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Chapter 7Comparing Nested Predictive Regression Models with Persistent Predictors
Inference on stock return predictability is commonly conducted by the in-sample inference on the coefficient estimator of the predictive regression, for which several problems have been identified such as the finite sample bias (when predictors are weakly stationary) and the non-pivotal and non-standard asymptotic distribution and un-correctable bias (when predictors are persistent), and various solutions to these problems have been suggested. In this paper, we adopt the out-of-sample inference of the predictive regression model by the encompassing statistic (ENC) that was studied by Clark and McCracken (2001) when predictors are weakly stationary. The contribution of this paper is to show that the ENC statistic has the asymptotic standard normal distribution even when predictors are persistent as well as when predictors are weakly stationary. This new result is important for empirical research on stock return predictability. While many technical problems arise for in-sample inference on the predictive regression due to persistence of predictors, the out-of-sample inference based on ENC is actually benefited from persistence of predictors because it makes the superconsistency and the asymptotic normality of the parameter estimation. Monte Carlo simulation shows that the asymptotic results hold in finite samples when predictors are weakly stationary and persistent. An application to the predictive regression of the equity premium reveals strong predictive ability of several persistent predictors.
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Chapter 8Have Mismatches Lowered the Korean Young Men’s Employment Rate?
Young men’s employment is at its lowest low level in Korea now. The ratio of employment to civilian population among men aged between 25 and 29 years stands at 69.4 percent as of 2014, which is below the level in most advanced countries and down by 10 percent points from its level in 2000. The most commonly acclaimed explanation for the low employment is the ‘mismatch’ hypothesis, though the terminology is used somewhat differently from that in the standard economics literature. The hypothesis maintains that the cause lies in the supply side: Over-education and the widened discrepancy between young men’s job expectation and their opportunities have made them to search for jobs for a longer period. This paper investigates whether the common belief is supported by empirical evidences and obtains a negative result. First, mass higher education did not enlarge the size of mismatches commensurately as the over-educated, who are college graduates at high school jobs, still enjoyed some college education premium. Secondly, there exists no systematic relationship between mismatches and durations of the search period for the first job no matter how the mismatches are defined. As a conclusion, this paper suggests that the cause lies on the demand side and not on the supply side.
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