KEA RESEARCH

Introduction & History

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The Korean Economic Association was launched in Pusan on November, 30, 1952.

Greetings

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As President of the Korean Economic Association for 2020, I would like to extend my sincere gratitude to you all for your continued support for our association.

KOREAN JOURNAL OF ECONOMIC STUDIES

The Industry-Level Mismatch Unemployment in Korea

Jiwoon Kim (Hongik University)

Year 2020 / Vol 68 / No 3

This study quantifies the contribution of the industry-level mismatch unemployment to the increase in the unemployment rate during 2013-2018(0.75%p) by using Sahin et al. (2014)’s methodology. Industry-level mismatch unemployment refers to the unemployment that occurs when job seekers’ movements across industries are hampered by labor market frictions such as wage rigidity, lack of information, skill mismatch, etc. According to the analysis, industry-level mismatch accounts for 23.6% of the observed increase in the unemployment rate during 2013-2018.

The Impact of Analyst Recommendation Changes on the Korean Financial Market and Sentiment

Karam Kim (Korea Asset Pricing), Heejin Yang (Dongguk University Gyeongju Campus) and Doojin Ryu (Sungkyunkwan University)

Year 2020 / Vol 68 / No 3

This study examines the effect of analyst recommendation changes on investor sentiment, stock returns, and trading behaviors of investors, and further investigates the sentimental effect regarding the reactions of the stock market and investors to analyst recommendation changes. Event study approach discovers that investor sentiment, stock returns, and net order imbalance all significantly react to analyst recommendation changes.Moreover, we find that the reaction varies by investor type, as the net order imbalance of domestic individual investors more significantly reacts to upgrades of analyst recommendations, while that of domestic institutional investors and stock returns more significantly react to downgrades. The cross-sectional regression, employed to examine whether investor sentiment contributes to such asymmetric responses, shows that investor sentiment significantly affects the reaction of the stock market to analyst recommendation changes, when analyst reports downgrade, the reactions of stock returns and individual investors’ net order imbalance to recommendation. These results imply that investor sentiment has a role in determining the reaction of the stock market to analyst recommendation changes.

Long-term Forecast of Recession Through Monetary Policy and Risk Premium Shock Trends’ Decomposition of Interest Rate Spread

Yun-Yeong Kim (Dankook University)

Year 2020 / Vol 68 / No 3

This paper analyzes whether the trend obtained by decomposing the expected portion of the interest rate spread into risk premium shock and monetary policy shock is useful for long-term forecasts of the recession. To do this, after obtaining the Beverage Nelson decomposition of the interest rate term spread from the co-integrated VAR model composed of short-term and long-term interest rates, the long-term expected monetary policy shock and the independent risk premium shock trend are estimated and evaluated. Next, in the linear and probit prediction models, we test whether these trends influence the predictive power of output gap and recession. Based on the proposed method, Korean data were analyzed through the probit model and FM-OLS estimation. In there, we found that the term spread was more effective for short-term forecasts of less than one year, and the trend of monetary policy shock and risk premium shock and risk premium shock were rather more effective for long-term forecasts of 1 year to 2 years.

KOREAN ECONOMIC REVIEW

Hollowing Out or Filling In? The Effects of Multinational Enterprises on Domestic Plant Turnover and Job Growth in Factory Asia

Hyunbae Chun (Sogang University), Jung Hur (Sogang University) and Nyeong Seon Son (Korea Information Society Development Institute)

Year 2020 / Vol 36 / No 2

In recent years, multinational enterprises (MNEs) originating from Asian countries, such as China and Korea, have rapidly expanded their global operations. However, the employment effects of these MNEs on their home countries have rarely been studied. By using Korean firm–plant matched data over the period of 2008–2013, we examine the effects of MNEs on domestic plant turnover and job growth. We find that Korean MNEs are more likely to close down their domestic manufacturing plants and open new plants than non-MNEs. Along with active plant turnover, Korean MNEs exhibit great active job reallocation across their domestic manufacturing plants within firms, without resulting in net job loss. In sum, Korean MNEs participating in Factory Asia have restructured their domestic manufacturing bases rather than hollowing them out. 

Impact of the Simultaneous Use of the Stigmatization and Categorical School Funding Policy on the Test and Post-Secondary Outcomes of Lower-Achieving Students

Seunghoon Han (Chung- Ang University) and Hosung Sohn (Chung- Ang University)

Year 2020 / Vol 36 / No 2

This study analyzes the impact of one type of school-based accountability system—the simultaneous use of stigmatization and categorical school funding—on test scores and post secondary outcomes. We conduct randomization inference in the context of regression discontinuity design by exploiting the discontinuous rule used in the accountability system in South Korea. The results show that the joint use of stigmatization and funding leads to a statistically and practically significant increase in test scores (7, 6, and 5 percentile points for reading, math, and English, respectively). Subgroup analyses by urban or rural areas show that the policy leads to a practically but not statistically significant increase in the share of students taking college entrance exams (4 percentage points) and a practically and statistically significant increase in the share of students matriculating into four-year colleges(9 percentage points) only for schools located in rural areas. We do not find any practically and statistically significant increase in the post-secondary outcomes for schools located in urban areas. 

The Monetary Policy Reaction Function in Korea with Multi-level Factors

Byoungsoo Cho (The Bank of Korea)

Year 2020 / Vol 36 / No 2

The monetary policy reaction function in Korea is estimated. In particular, a variant of the Taylor rule is analyzed using information from a panel of macroeconomic variables in the United States (US) and Korea. The main findings are as follows. First, two global factors common to both countries are significant in the monetary policy reaction function,while no country-specific factors are significant. Second, the information contained in the sefactors is similar to variables, such as the credit spread in the US, the KRW/USD exchange rate, non-farm employment, and business survey indices for new contracts and sales in Korea. As such, these variables are also significant when added to the monetary policy reaction function. Third, the policy response to the inflation rate becomes significantly positive only when these additional variables are added, which is consistent with the legal purpose of monetary policy under the inflation targeting regime in Korea. 

KOREAN ECONOMIC FORUM

A Tale of Two Countries

Kyungsoo Kim (Sungkyunkwan University)

Year 2020 / Vol 13 / No 3

In the last decade, the net foreign assets (NEA) of both Korea and the United States have shown the opposite pattern from the previous decade. Korea’s NEA,which had recorded negative despite the current account surplus (CA), has turned to a positive. Meanwhile, in the United States, there has been a decline in the NEA, that is far less than the CA deficit. These two phenomena can not be viewed as a coincidence and should be explained. First, the change in the NEA pattern took place primarily in external debt (EL) in both countries and was driven by valuation channels. Here, the strong dollar along with the preference for global safe assets due to global financial vulnerabilities seems to have had a major impact on ELs. Second, the rates of return on Korea’s external assets (EA) and US EL has converged. This is because both Korea’s EA and USEL have been rebalanced to high-yield components such as ‘stocks.’ In Korea,the share of ‘direct investments’ and ‘stocks’ increased, which led to an increase in return on EA, while the share of ‘reserves’ decreased significantly. Likewise,the share of ‘stocks’ in US EL increased while the share of ‘other investments’decreased. Increasing demand for risky assets of the center country means that international capital flows motivated by risk diversification are increasing. The paper discusses the policy implication of EA configuration evolving under the current Korea’s foreign exchange system.

A Study on the Announcement Effect of the Report of Change in the Purpose of Bulk-Holding in the Korea Stock Market: Transition of General Investment Purpose

Keun Woo Park and Sang Hee Won (National Pension Fund Management Special Committee), Chong-Hyun Won (National Pension Fund Management Special Committee)

Year 2020 / Vol 13 / No 3

In 2020, a plan to revise the disclosure act of report on bulk holdings was implemented. The purposes of holding stocks in bulk have been subdivided into the simple investment, general investment, and management participation. If shareholders report general investment objectives for investment purposes,shareholder activism is possible. Thus the reported company may have a governance improvement effect. This study analyzed market reactions when changes were made for general investment purposes from simple investment purposes. This study analyzed market reactions when bulk-holding investors made changes for general investment purposes from simple investment purposes. As a result of the analysis, firms that have changed holding objectives have an average abnormal return of 0.4%p from one day before the date of disclosure until one day after the date of disclosure. This effect, if disclosed by the National Pension Service, results in a higher average abnormal return of 0.7 percent Next, we analyzed the investors’ transactions based on the disclosure date. Individual investors’ trade imbalance rises after the disclosure, and institutional investors’ trade imbalance falls. These results seem to be due to individual investors’ expectations for improved corporate governance in the future. Besides, this study shows that a short-term decline in performance may occur five days after the announcement of changes in investment purposes. This study contributes to the literature on the announcement effect of the public pension fund and the literature on governance improvement disclosure through hand-collecting data. On the other hand, this study was conducted shortly after the revision of the act of report on holding stock of bulk was implemented, and there are limitations that lack time series to measure the long-term performance of the announcement effect.

Financial Reform of Transitional Economies and Implications to Inter-Korea Financial Cooperation

E-Sub Choi (KAMCO Research Center) and Yoonsok Lee (Korea Institute of Finance)

Year 2020 / Vol 13 / No 3

This paper analyzes the financial reforms of Eastern Europe, where rapid economic transition took place and the case of China and Vietnam where transition is still in place and draws implications to future Inter-Korea financial cooperation. Financial reform such as introducing two-tier banking systems,establishing stock exchanges, resolving NPL issues, strengthening financial supervision are universal among transitional economies. In the case of Eastern Europe, promoting new entry of banks and seeking large scale financial assistance thru international financial institutions economic reform packages took place. China pursued the reform and open door policy by utilizing special economic zones and using Hong Kong as a means to attract foreign capital.Vietnam introduced various measures to cope with dollarization of the economy.These characteristics of transitional economies give rise to the following implications. First, enhancing the capacity of human financial resources in North Korea is imperative for tackling bad loan issues and calls for the need of Inter-Korea financial cooperation to meet this demand. Second, ideas to assist North Korea’s reform and liberalization thru the use of ‘special economic zones for unification’ are needed. Third, we must contemplate on methods to institutionalize the funds of the underground economy in North Korea via utilizing the South Korean financial markets. Lastly, given that the countries will form a single market in the future, ways to cope with the ‘dollarization’ problem in North Korea should be dealt with.