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

The Effect of Child Support Payment Coupons in Response to COVID-19 on Household Spending

Chulhee Lee (Seoul National University) and Sujin Lee (Seoul National University)

Year 2021 / Vol 69 / No 3

This paper examines the household spending effects of child support payment coupons in South Korea, which were granted to subsidize households suffering from COVID-19. The results of difference-in-differences estimation suggest that child support payment coupons increased household spending by a weekly average of 22,355 South Korean Won (KRW) over 10 weeks, which is 8.8% of the treatment group’s average consumption for the period of analysis. Child support payment coupons have positive impacts on supporting both children and small-scale business-owners. The effect on household spending is shown to be significantly larger for low-income households, compared to that of the top 20% of households. We find that coupon redemption replaces some of the household spending that would occur if there was no support from the government. The size of the net effect (weekly average of 22,355 KRW over 10 weeks) is determined by the difference between coupon redemption (57,620 KRW) and the size of the substitution effect (35,256 KRW). These results imply that the net effect of the coupons is estimated to be approximately 39% of the coupon redemption for 10 weeks. We also discuss the implications of our findings on the effects and design of government subsidies.

The Impact of Greenhouse Gas Abatement Policy on Manufacturing Industries in South Korea

Eunsun Gil (Korea Institute for Industrial Economics & Trade), Sul-Ki Lee (Korea Institute for Industrial Economics & Trade) and Mira Rim (Bank of Korea)

Year 2021 / Vol 69 / No 3

CO2 emissions in Manufacturing industry account for about half of national greenhouse gas emissions in South Korea. To control for endogeneity between output and greenhouse gas emissions, this paper uses employment and total payroll as instrumental variables in an analysis of 2012-2018 linked panel data. Following the implementation of climate policy, CO2 emissions from production activities in the manufacturing sector increased significantly, running counter to policy objectives. Since the primary metals industry shows a high degree of regional heterogeneity in carbon dioxide emissions relative to its production level, it is necessary to upgrade facilities and adopt technologies for particularly ‘brown’ firms.

Theoretical and Empirical Analysis on the Effects of ‘Social Progress Credit Program’ on Participating Social Enterprises

Hyunwoo Hong (Institute of Economic Research, Seoul National University) and Biung-Ghi Ju (Seoul National University)

Year 2021 / Vol 69 / No 3

The purpose of subsidizing social enterprises is to help supporting innovative social enterprises and their growth through providing incentives of their social impacts. However, to function as an effective incentive scheme, the subsidy allocation must be designed to reward social impact performances properly. This study uses data from the “Social Progress Credit Program” in the private sector to theoretically and statistically analyze the effect of the subsidy program on the performances of social enterprises, in particular, their social impacts. The program is designed to measure social impact in monetary units and provide monetary incentives in proportion. If participating firms maximize theirperformances expressed as weighted averages of profit and social impact, the program will provide firms incentives to increase their social impacts and more support is provided to firms that generate social impact more efficiently. It also provides incentives for firms to increase their social impact in each period, being designed to provide proportional support for the growth in their social impacts over a three-year period. Empirical analysis shows that the subsidy program incentivized the firms to increase their social impacts and their social impacts increased year by year, which is consistent with our theoretical results.

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.