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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Thank you for your support for the Korean Economic Association (KEA). The KEA has been representing Korean economists for the last 70 years. Now we have about 5,000 members including more than 1,000 life members.

KOREAN JOURNAL OF ECONOMIC STUDIES

Presidential Address: Economics about Losers

In Ho Lee (Seoul National University)

Year 2021 / Vol 69 / No 2

This paper analyzes the effect of compensation for losers on competition in terms of providing incentives to market participants. We consider a model in which the relative difference between the rewards received in case of success and failure in competition determines the size of investment in technological innovation. The difference in rewards between winners and losers in competition plays an interesting dual role. While the difference in rewards between winners and losers provides incentives to work hard, if the difference is too large, it prevents them from participating in the competition in the first place. To encourage participation in competition, we suggest increasing the overall level of compensation while maintaining the relative loss suffered by losers.

Does Holding Company System Affect the Corporate Governance and Related Party Transactions?

Joohyeon Kim (Korea Fair Trade Commission) and Sangin Park (Seoul National University)

Year 2021 / Vol 69 / No 2

Using propensity score matching and a difference-in-differences method, we empirically find that the conversion to the holding company system has improved the corporate governance of chaebol firms but raised its related party transactions. The results suggest that chaebol controlling family’s tunneling using related party transactions may be exacerbated despite apparent improvements of corporate governance scores of individual firms after the conversion to the holding company system.

A Study on Sustainability of Local Public Expenditures in South Korea Based on Analysis of Long-run Causality Tests

Beung-Ky Oh (Gwangju-Jeonnam Research Institute)

Year 2021 / Vol 69 / No 2

Recently, there have raised concerns about the sustainability of the public finance after the spread of the Covid-19 outbreak. In the empirical contrast,this study tests long-run Granger causality between GDP and public expenditures (national and local) for 1967 to 2018 in South Korea. The results obtained lead us to significant evidence for Wagner’s law throughout the whole period analyzed, which means GDP or GRDP influences public expenditures growth. Moreover, this paper finds more cases of significant causality of Wagner’s law at local level rather than national level. These findings underline the importance of sustainable public finances that consider the uncertainties of future finances with weak financial abilities of local governments.

KOREAN ECONOMIC REVIEW

On the Long-Term Effect of Recent Housing Policies in Korea

Byoung Hoon Seok (Ewha Womans University) and Hye Mi You (Hanyang University)

Year 2021 / Vol 37 / No 2

This paper explores the long-term effect of recent housing policies in Korea. Using a twosector general equilibrium model with heterogeneous agents, we conduct three policy experiments: i) a reduction in the loan-to-value (LTV) ratio; ii) an increase in the house acquisition tax rate; iii) an increase in the property tax rate. We find that all three policies increase the relative price of housing structures in the long run, yet their quantitative effect is small, and that the reduced LTV ratio is effective in reducing the household debt. Heterogeneous responses to these policies depending on household wealth are crucial in these results. 

The Economic Costs of Diplomatic Conflict: Evidence from the South Korea–China THAAD Dispute

Hyejin Kim (Bank of Korea) and Jungmin Lee (Seoul National University and Institute of Labor Economics (IZA))

Year 2021 / Vol 37 / No 2

We examine the economic effect of the diplomatic conflict between South Korea and China that resulted from the joint decision by South Korea and the U.S. to deploy the Terminal High-Altitude Area Defense system in the Korean peninsula. Using the synthetic control method, we estimate the conflict’s effects on Chinese tourists to Korea and stock prices of China-related Korean firms. We find that a negative effect on the inflow of tourists appeared with a lag of 3 months after the announcement of the decision and persisted for approximately 18 months. By contrast, the effects on the stock market appeared immediately but were insignificant and short-lived. 

The Uniqueness of Dynamic Groves Mechanisms on Restricted Domains

Kiho Yoon (Korea University)

Year 2021 / Vol 37 / No 2

This paper examines necessary and sufficient conditions for the uniqueness of dynamic Groves mechanisms when the domain of valuations is restricted. Our approach is to appropriately define the total valuation function, which is the expected discounted sum of each period’s valuation function from the allocation and thus a dynamic counterpart of the static valuation function, and then to port the results for static Groves mechanisms to the dynamic setting. 

KOREAN ECONOMIC FORUM

The Effects of Factor Substitution and Technological Progress on the Growth and Distribution of the Korean Economy

Jong-Wha Lee (Korea University)

Year 2021 / Vol 14 / No 2

This study analyzes the growth and distribution of the Korean economy using a neoclassical growth model that considers production factor substitution and technological change. The CES production function estimates show that the substitution elasticity between aggregate labor and physical capital is about 0.95 for the period from 2000 to 2017, suggesting that when physical capital per effective labor expands, labor income share is stable. In contrast, skilled and unskilled labor are highly substitutable, so the income share of skilled labor increases with the supply of highly educated workers. Korea’s labor hours,physical capital, human capital, and total factor productivity growth have slowed, contributing to the downward trend in GDP growth. The estimated contributions of labor hours, physical capital, human capital, and total factor productivity to the average annual GDP growth rate of 3.5% in 2010-2017 were 0.3%, 1.7%, 0.3%, and 1.2% points, respectively. For inclusive and sustainable growth, Korea must pursue policies to enhance human capital accumulation and technological innovation.

Lender of Last Resort by the Article 80 of the 『Bank of Korea Act』

Inseok Shin (Chung-Ang University)

Year 2021 / Vol 14 / No 2

In the wake of a financial turmoil triggered by the Covid19, the monetary policy board of Bank of Korea adopted emergency lending measures in 2020,based on article 80 of the Bank of Korea Act. With the backdrop of the two measures, this study analyzes the lender of last resort conducted by the Bank of Korea in its capacity and procedure. It argues that (1) legislators of the article 80 in 1997 intended to limit the target of emergency liquidity to non-banking financial institutions, though wording of the article was left unclear on whether it could be extended to non-financial corporations; (2) in the post Global financial crisis environment, the possibility of a financial crisis centered in capital markets needs be allowed for, thereby the necessity of designing a new framework for the lender of last resort function accordingly; (3) the Bank of Korea needs be explicitly allowed to provide emergency liquidity to non-financial entities; (4) at the same time, potential loss related with the liquidity provision to non-financial entities should be born by the fiscal authority as such policy measures are observationally equivalent to fiscal policy measures.

Full Employment Mandate for Bank of Korea

Soyoung Kim (Seoul National University) and Yeil Lee (Seoul National University)

Year 2021 / Vol 14 / No 2

This paper reviewed the issues related to ‘adopting employment mandate as monetary policy objective in Korea’. Considering the possibility of increasing inflationary pressure after the COVID-19 pandemic and restoring inflation-output trade-off, and the recent surge in asset prices and credit, there is a concern that employment mandate will lead to excessive stimulus in the economy, resulting in a sharp decline in welfare by rapid inflation and financial instability. Limitation of labor statistics, discrepancy between output and employment, and an increase in policy discretion can add some difficulties. The Bank of Japan and European Central Bank have not introduced the mandate yet. At this point, rather than introducing the employment mandate, it is worth taking the time to review this issue while monitoring key economic conditions such as inflation pressure,inflation-output trade-off growth-inflation relations, and financial stability and watching other major central banks’ positions on the issue. If employment mandate should be introduced now, it is desirable to first consider introducing it as a hierarchical responsibility that prioritizes price stability so as to minimize side effects.