Second, substantial time has passed since the introduction of Conformity Verification System and Fast Track-and-Temporary Licensing System, established in 20011 and 2014, respectively, however, still the utilization is low.  

 

 

 

 

 

 

Volatilities of price indicators have remained extremely stable during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down the risk premium which could cause global investors’risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received huge capital inflows backed up by the increased risk appetite of global investors. US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premiums to normalize. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we provide an overview of the volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset？Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows. First, we provide an overview of volatility of financial markets and recent trends in capital flows in Chapter 2. The continuation of low volatility and ample funding at low rates has encouraged market participants to take increasingly speculative positions. Thus, many large EMs have experienced a surge in capital inflows in the aftermath of the GFC. In addition, the composition of capital flows has changed significantly over the past few years. Prior to the GFC, banks’short-term loans mainly took the large volume of capital inflow to EMEs. After 2009, however, portfolio investment (equity and fixed income debt) has taken a larger share. It would be dubbed ‘the second phase’ of global liquidity. And we assess the impacts of push (global) and pull (country-specific) factors on capital inflows to EMEs. According to the results, push factors are more significant for capital inflows to EMs. This implies that domestic policy tools are limited in terms of addressing the macroeconomic and financial stability risks driven by capital inflow surges from abroad. There is concern that the US Fed’s imminent lift-off in policy rates may have a significant impact on capital flows and economic growth in emerging market countries. Thus we may need to find policy tools to respond to these important issues. Against this backdrop, we conducted empirical research to better understand the effects of price volatility (VIX) and interest rate spreads on the capital flows of emerging economies in Chapter 3. In the study, we chose to utilize fund flow data from EPFR (Emerging Portfolio Fund Research) whose data has higher reporting frequency than conventional capital flow data sources. The implications from our empirical results are threefold. First, an increase in volatility is associated with net outflow of funds from emerging economies. Second, our results do not unconditionally support the textbook effects of widening of interest rate spreads leading to capital inflows in emerging economies. Lastly, interest rate spreads had opposite effects on the capital flows of emerging economies depending on the level of volatility. In times of heightened volatility, widening interest rate spreads were associated with positive (+) capital inflow. In contrast, the widening of interest rate spreads was negatively (-) associated with capital inflows when volatility was low. This particular empirical result on the effect of interest rate spread suggests that it may be difficult to address issues of volatile capital flows using monetary policy alone. The results also suggest it is important to consider the effect of volatility when conducting monetary policies in emerging economies. In Chapter 4, we review the use of capital flow management policies in emerging economies including Korea.  A surge in capital inflows to EMEs may deepen volatility and vulnerability of the macro-economy and financial markets. The IMF provided a clear and consistent perspective with respect to capital flows and policies. Policymakers should take into account appropriate macro-economic policies at first, and then need to employ Capital Flows Management Measures (CFMs) and Macro-prudential Measures (MPMs) to respond to capital flow surges. Several emerging economies introduced CFMs to address side effects from the high volatility of capital flows. Beginning in June 2010, Korea introduced a series of Macro-prudential measures (MPMs) aimed at building resilience against external financial shocks, especially against vulnerability to capital flow reversals in the banking sector. These MPMs succeeded in reinforcing the banking system’s soundness by improving the structure of foreign debt of the banking sector, and reducing capital inflows in short-term portion and stabilizing volatility of capital flows. There are, however, limitations that MPMs in Korea are placing more emphasis on consolidating foreign liquidity soundness of the banking sector. In addition to the above, it is imperative that Korea make preparations to reduce volatility of capital flows in equity and debt. In chapter 5, we discuss asset-based reserve requirement policy as an instrument to cope with financial systemic risk. Specifically, we compare the effects of asset-based reserve requirement and Basel III-type countercyclical capital buffer using a DSGE (dynamic stochastic general equilibrium) model. Asset-based reserve requirement forces financial institutions to set aside a certain portion of their assets as reserves. In this sense, it contrasts with the current reserve requirement system that is imposed on the liability side of the banks. In particular, it can be used to alleviate credit overheating in a particular sector of the economy, such as the household mortgage market. We introduce heterogeneity into the credit market by assuming two types of entrepreneurs, and a bank that allocates lending to both entrepreneurs. Given common external shocks that has identical effects on both credit sectors, both asset-based reserve requirement and countercyclical capital buffer perform equally well to mitigate the credit cycle. However, given sector-specific shocks that generate sector-specific credit cycles, an asset-based reserve requirement performs better than the countercyclical capital buffer. The reason is that the former can adjust the asset return of the sector where credit cycle arises while leaving the other sector unaffected, but the latter affects the profitability of the entire bank as well as credit to the other sector that is unrelated to the shock. Also, accumulated reserve can be used to cover liquidity shortfalls when financial conditions deteriorate, as in periods of sudden capital outflows. In this paper, we find the evidence that capital flows to Korea are more sensitive to global factors (push factors). This gives an appropriate prominence to  the recipient countries introducing CFMs and MPMs in response to global liquidity expansion. We have seen that effect of interest rate spreads on capital flows vary according to the degree of volatility. Accordingly, monetary policy alone cannot address problems posed by capital flows surges. Many papers suggest that MPMs in Korea are effective in controlling capital inflow and would strengthen external stability. However, these measures are limited to simply responding to surges in capital outflows, expected as the consequence of normalization of US monetary policy. A broader policy package should be introduced to address the macroeconomic and financial stability risks to which capital outflow surges can give rise. In the short term, accumulation of foreign currency reserves, financial safety net, IMF’s special drawing rights (SDR) could be effective as a first aid measure. In the medium term, expanding the scope of application of MPMs from banks to non-banks (i.e. shadow banking) might be the way forward.

 CONTENTS

 Executive Summary

 I. Introduction

 II. A Model of Optimal Liquidity and Consumption-Investment Decision
 1. Representative Firm
 2. Representative Consumer
 3. Credit Bank
 4. Government
 5. A Liquidity Growth Rule
 6. Solution and Calibration
 7. Impulse Responses

 III. Empirical Implications from the OECD Flow-of-funds Data
 1. Summary Statistics from Selected OECD Countries’ Data (1995-2012)
 2. A Regression Analysis

 IV. Summary and Conclusion

 References

 Appendix 
 

This research paper intends to redefine and extend the concept of ‘optimal li-quidity’ discussed in Han and Lee (2012). For this purpose, we have distinguished between liquidity held by households and liquidity held by firms following Levhari and Patinkin (1968) and Yoo and Pyo (1986). Han and Lee (2012) have revised the ‘money-in-utility’ model by Walsh (2012) and derived the relationship between liquidity and consumption. In the present paper, we have extended Han and Lee (2012) to a ‘money-in-utility-and-production’ model. We have specified a DSGE model in which liquidity serves for both household utility and production input and have conducted the impulse-response analysis. The impulse-responses of most of important variables from the shock of TFP increase are consistent with the results of Bhattacharjee and Thoenissen (2007). On the other hand, the policy interest rate shows a hump-shaped impulse-response, which is consistent with the impulse response of monetary expansion in the cash-in-advance model. In addition, the increase in money supply has produced a kind of crowding-out effect reducing the share of liquidity held by firms. The main policy implication of our model is that not only the absolute level of optimal liquidity but also the relative distribution of the liquidity between households and firms are important determinant for economic growth and stability. In order to validate this proposi-tion, we have conducted a panel regression analysis and have empirically verified the proposition that the relatively higher share of liquidity held by firms would contribute to both GDP growth and its stability.  

Contents 

 

Executive Summary  

 

I. Introduction
1. Literature Survey
2. Sources of Information on TBT  

 

II. TBT: Characteristics and Multilateral Cooperation
1. Technical Measures as Potential TBT
2. Proliferation of Technical Measures
3. Multilateral Cooperation, the WTO TBT Agreement
4. Information and Characteristics of TBT  

 

III. WTO TBT Notifications: Trends and Characteristics
1. WTO TBT Notifications of WTO and APEC Members
2. By Technical Regulation and Conformity Assessment Procedures
3. By Stated Objectives of Regulation
4. By Product
5. Average Comment Period of TBT Notifications 

 

IV. Specific Trade Concerns
1. TBT and STCs
2. Aggregate Number of STCs Raised
3. By Type of Concerns Raised 
4. By Technical Regulation and Conformity Assessment Procedures 
5. Number of TBT Committee Meetings Raise the Same Concern 
6. By Stated Objectives
7. By Commodity   

 

V. Dispute Settlement Cases 
1. WTO Dispute Settlement Procedure
2. Dispute Settlement Cases Related to the TBT Agreement 
3. By the Date of Consultation Requested and Current Status 
4. By APEC Member 
5. By Commodity or Related Technical Measure 
6. By Article of the TBT Agreement   

 

VI. Summary and Implications   

 

References  

 

Appendix   

As tariff barriers, of traditional and typical policy instruments in international trade, have been reduced significantly under preferential trade agreements as well as the multilateral trading system, non-tariff measures (NTMs), especially those of technical barriers to trade (TBT), become more and more important as means to control international trade. This study is to analyze and better understand TBT or more accurately, technical measures. Based on the analysis, it will attempt to identify some implications and ways to reduce TBT or to facilitate international trade, and ultimately contribute to enhancing economic integration in the Asia-Pacific region.
The characteristics and trends of technical measures can be best identified and evaluated by the notifications of WTO members according to the Agreement on Technical Barriers to Trade (TBT Agreement), discussions in the WTO TBT Committee - especially specific trade concerns (STCs), and dispute settlement cases in TBT related issues. In fact, the number of TBT notifications have surged as various and comprehensive legitimate objectives of technical regulations were allowed and on other backgrounds since the launch of the WTO in 1995. It is noted, however, that TBT notifications are not regarded as TBT itself but as “potential” TBTs in this study.
To analyze the trends and characteristics of TBT measures, this study utilizes the information in the WTO TBT notifications, STCs, and dispute settlement cases related to the TBT Agreement. Focus will be on the APEC member economies. Some trends and characteristics of TBT measures by the objective of regulation, by commodity, and by the country notified (e.g., developed and developing economies) will be analyzed and identified. Some of implications from the results are as follows. Due to the fact that technical measures are mostly domestic regulations but controlled at the border to restrict market access, there needs to be consultation, cooperation and harmonization of regulation rather than competition and retaliation.
There also needs to be developed a system for information and experience exchange, capacity building including on development and implementation of standards, technical regulation, and conformity assessment procedures, especially for developing economies. APEC is well positioned to lead international cooperation in TBT with its diverse members and related specific institutions.

 

In response to the change of internal and external conditions such as the pursuit of sustainable growth and global financial crisis, China is switching the economic growth method to domestic demand-led growth. For this purpose, it is promoting various plans to boost domestic demand such as the improvement of income distribution, expansion of social security system, promotion of new urbanization, and development of service industry, and it is also encouraging the suppression of processing trade, enhancement of domestic companies’ import-substituting capacity and productivity, and industrial upgrading. As a result, the imports for processing trade has been reduced while the general trade targeting China’s internal consumption (domestic demand) is rapidly increasing.
On the other hand, Korea is trying to improve access to China’s domestic market which is showing a rapid growth through the Korea-China FTA and the bilateral economic cooperation between the two countries; however, with the current downswing in Korea’s exports of petrochemical products, displays and general machinery to China, there is a growing need to check its export strategy to China. Thus, this study aims to seek ways to expand Korea’s exports to China by analyzing the structural changes in China’s import market for domestic demand, Korea and other major countries’ export status and competitive relationship. In particular, the characteristics of the import market for domestic demand was analyzed by the processing steps (18 detailed steps) and the type of industry (24 detailed industries), and the competitive relationships between Korea and other major countries (Taiwan, Japan, United States, Germany) in China’s import market for domestic demand were identified through the analysis of market share, market comparative advantage, and export similarity.
This study reveals that slowdown of Korea’s exports to China is because the importance of the areas (processing trade, intermediate goods, electronics and chemistry) where Korea’s exports are concentrated have decreased in China’s import market for domestic demand, and because Korea’s competition with Taiwan and Japan is deepening in the areas where demand is increasing due to the lack of China’s own production capacity. Korea need strengthening of export competitiveness of parts and components for China’s domestic demand; expansion of the market entry for China’s consumer goods such as household food and beverage, electrical equipment, cosmetics whose demand is soaring; value addition and product differentiation in the electronics and chemistry areas with comparative advantages; diversification of export industries; and devising countermeasures against competition with Taiwan (electronic parts and computers related parts and components) and Japan (chemical product related semi-finished products). 

 

 

 

 

About KIEP
President’s Message
About KIEP
Vision & Mission
Organization
History
KIEP 2014

 

Infographics
KIEP in Policy
KIEP in the Media
KIEP in the World

 

Highlight 2014
Projects Noted for Excellence in Policy Contribution for 2014

 

Bright 2014
Research Goals in 2014
Project Composition & Performance for 2014
Research Achievements by Category for 2014
International Macroeconomics & Finance
International Trade
International Cooperation Policies
Asia-Pacific Studies
Europe, Americas and Eurasia Studies

 

Flight 2015
2015 Research Goals
The Way Forward in 2015

 

Settlement of Accounts for 2014
Statement of Revenues,Expenditures, and Changes in Fund Balance

The 2014 annual report is a compilation of our in-depth studies and reports to give readers clear information on what we have done over the year. KIEP’s research spans a broad range of economic issues - i.e. the Korean economy and its increasing relevance to the global economy; new global challenges, such as climate change,
development aid, and global commons; economic integration in East Asia and in Asia-Pacific; Korean economic paradigm and income disparity; and country comparison of issues, such as employment and population aging.
KIEP’s work will gain importance as a reliable source of information and analysis in shaping public policies. KIEP remains committed to supporting the government in its economic policy development. On behalf of KIEP, I extend my heartfelt gratitude to all for the support and keen interest in our work.

Executive Summary

1. Introduction

2. Benchmark Model
2.1 Preferences
2.2 Production and Learning Technology
2.3 Entrepreneur
2.4 Worker
2.5 Occupational Choice
2.6 Competitive Equilibrium
2.7 Accumulation Thresholds

3. Two Regimes of Growth Paths
3.1 Endogenous Growth Regime
3.2 Neoclassical Growth Regime
3.3 Tax Policies for Regime Change

4. Small Monitoring Costs
4.1 Worker-Capitalists
4.2 Occupational Choice

5. Income Distribution Policy and Growth
5.1 Model with Imperfect Competition
5.2 Market Distortion and Income Distribution Policy

6. Conclusion

References

This paper develops a model which allows us to analyze the effect of policies that influence income distribution between capitalists and workers (such as taxes and market imperfections) on the log-run growth path of an economy. More specifically, we present a heterogeneous agent model where some agents choose to be capitalists to specialize in accumulating physical capital and others become workers accumulating human capital. An important feature of this model is that it can be reduced to either an endogenous growth model or Neoclassical growth model. For a range of the parameters of technology and policy variables, the model generates a balanced growth path where capitalists continue to accumulate physical capital and workers human capital, as in AK model of endogenous growth. For a different range of parameters, the model generates a steady state along which both capitalists and workers do not increase physical or human capital any longer as in Neoclassical growth models. This model, therefore, can be viewed as a synthesis model of endogenous and neoclassical growth.
An advantage of this synthesis growth model is that it allows us to explain the shift in the growth path in response to policy shocks that affect the capital-labor income distribution. This growth model explains the change in the path from sustained growth to zero growth as a regime change from endogenous growth to Neoclassical growth regime, and that from zero to sustained growth as a regime shift of the other way around. Based on the synthesis growth model, we show that changes in labor income share or government policies that make such changes may induce a shift in the growth regime and subsequent change in the balanced growth path. The policies of capital-labor income distribution include those of changing labor and capital income tax rates and regulations on monopoly or monopsony. The monopolist firms which have monopsony power in labor market can choose the wage rate rather than take it as given. Thus they may drive the wage rate down below labor productivity, which would induce a decline in labor income share and zero growth. We show that in this situation the government policy of regulating monopoly/monopsony or raising wage rates may raise labor income share, and by doing so, trigger human capital accumulation and an ensuing shift to a path of sustained growth.