Executive Summary

1. Introduction

2. Academic Literature on China’s Development Finance

3. Chinese Development Finance to Asia

4. Data and Model
4-1. AidData
4-2. Explanatory Variables
4-3. Model

5. Estimation Results
5-1. China’s Aid
5-2. China’s OOF-like Flows

6. Further Discussions on Southeast Asia

7. Conclusion

References  

This paper examines the determinants of China's development finance to developing countries with a focus on Asia from 2000 to 2012. It uses a recent version of China Aid Data, one of the most reliable and publicly available data sources that systematically collect and differentiate different types of China's official development financial flows. This paper differs from previous studies in two aspects that (1) it analyzes a wider range of developing countries, moving beyond earlier research largely limited to Africa; and (2) it examines regional variation in China's motives for development financing. The findings show that China's allocations decision for concessional development flows, or ODA, has mixed motives of humanitarian, commercial and strategic interests. It is noteworthy that China's ODA appears not to be in competition against, but rather in a complementary form to, established donors in this period. Yet substantial regional variation is observed, suggesting different regional dynamics are at work. On the other hand, it is found that China's allocations decision for less-concessional development financing largely follows commercial considerations. This paper also provides detailed discussion of the trends in China's development finance to Southeast Asia, which is an Asian region critical for China's economic and foreign policy interests. The paper ends with a discussion of the implications of possible shift in China's overseas development finance strategy since 2011. 
Keywords: China, Asia, Development Finance, Aid

Executive Summary

1. Introduction 

2. Recent Trend of Anti-Dumping Measures

3. Effect of Anti-Dumping Duties on Import

3-1. Model
3-2. Data
3-3. Estimation Results

4. Survival Analysis of Anti-Dumping Duties

4-1. Introduction
4-2. Model and Data
4-3. Estimation Results

5. Concluding Remarks

References 

This paper studied the effects of anti-dumping measures on the imports to investigate whether the trade restriction effect of an anti-dumping duty is dominant in the US, the EU, China, and India from 1996 to 2015. Our results indicate that a 1% increase in the anti-dumping duties decreases the import of the targeted product by about 0.43~0.51%. The actual statistics, however, show that the total import of the targeted products increased by about 30 percent while an anti-dumping duty was in force. That indicates that an anti-dumping duty is just a temporary import relief.
This paper also investigated whether an anti-dumping duty is terminated in the case that the injury would not be likely to continue or recur if the duty were removed. The increase in market share, MFN tariff rate, and dumping margin turns out to decrease the hazard of termination of an anti-dumping duty, but the increase in value added increases the hazard of termination. Generally speaking, this result indicates that the WTO member countries have regulated the overuse of an anti-dumping measure. It also implies that anti-dumping duties have been used as a tool for trade remedy.
The findings of this paper show that there is a country- and industry-wise heterogeneous characteristic in the effect as well as termination of an anti-dumping duty. To conclude, an anti-dumping duty is not necessarily a protectionist measure if it is effectively controlled by the WTO rules. In this sense, the WTO member countries need to introduce a more transparent mechanism and due process.

Preface

Contributors

Introduction and Overview
Cho Lee-Jay and Lee Chang Jae

Statements by Hosts and Country Representatives

 

Part I. Jilin Province’s Economic Development and Northeast Asia Regional Cooperation in the Context of the Belt and Road Initiative

Part II. Cross-Border Infrastructure and Special Economic Zones in Northeast Asia

Part III. Future Tourism Cooperation in Northeast Asia

Part IV. Building a Northeast Asian Economic Community

Part V. Financial Cooperation in Northeast Asia

Part VI. Energy and Environment in Northeast Asia

Appendix 

The Northeast Asia Economic Forum (NEAEF) is a regional nongovernmental organization created in 1991 to sponsor and facilitate research, networking, and dialogue relevant to the economic and social development of Northeast Asia. The Forum is also committed to promoting understanding and relations among the peoples of Northeast Asia, North America, and Europe.
 NEAEF’s main objective is to conduct research and conference activities aimed at functional economic cooperation such as cross-border energy, transportation and logistics infrastructure development, and capital mobilization. The Forum holds annual conferences, workshops, and seminars for planning, facilitating, coordinating, and implementing international and interdisciplinary solutions to common policy problems. It is the only nongovernmental regional organization in which all the nations of Northeast Asia and the US are consistent and active participants.
 For the year 2016, NEAEF in collaboration with the Korea Institute for International Economic Policy (KIEP), carried out activities aimed at building a Northeast Asian economic community. NEAEF has established the basis of a strong network for functional cooperation, for example, regular discussions among stakeholders on financing cross border infrastructure development. For the year 2016, the goal was to take more concrete steps toward a Northeast Asian economic community including efforts to increase dialogue with North Korea, with a view to future functional cooperation. NEAEF has continued to maintain a cooperative networking approach and exchanges with North Korea regarding the Tumen River Area and North Korean special economic zones.
 This year’s volume titled, Consensus Toward a Northeast Asian Economic Community presents the results of a project implemented in 2016 that includes the planning meeting discussions as well as the presentations and summaries of the 2016 NEAEF Annual Conference in Changchun, China.
 

Contributors

Introduction and Overview

Mark Thoma

Session 1 Trade

China’s Emerging Trade Strategy: Drivers, Influence and Implications for North Pacific Economic Cooperation

Yong Wang

1. Key Drivers of Change in China’s Trade Policy
2. China’s Emerging Trade Policy
3. Why will China Embrace Higher Standard FTAs?
4. Integrate the Belt and Road Initiative and AIIB into China’s Trade Policy
5. Implications for the Global Trade Order and North Pacific Economic Cooperation
References

China’s Belt-Road Initiative and Korea’s Eurasia Initiative

Inkyo Cheong

1. Introduction on Korea’s Eurasia Initiative
2. China’s Belt-Road Initiative
3. Korea’s Nordpolitik and Recent Performance of its Eurasia Initiative
4. Conclusion and Policy Implications

The Trans-Pacific Partnership Agreement High Diplomacy and Low (Domestic) Politics

Claude Barfield

1. Broad Themes and Analytic Frameworks
2. Security/Diplomatic Rationale of Trade Policy
3. The Low Domestic Politics of Trade: Who Wins and Who Loses
4. The Political Problem Areas
5. Concluding Observations

Trade

Comments by Taeho Bark

Strengthening North Pacific Cooperation
Comments by Theresa Greaney

 

Session 2 Macroeconomic Perspectives

Global Economic Problems and Emerging Market Economies’ Macroeconomic Policies

Inchul Kim

1. Introduction 102
2. Global Economic Environment 103
3. Analysis of Global Economic Problems 104
4. Macroeconomic Policies for EMEs 109
5. Conclusion 113

References 114
Economic Conditions in the US and the Uncertain Prospects for Future Economic Growth

Mark Thoma

1. Introduction
2. The Current State of the US Economy
3. Forecast for GDP
4. Risks to Growth
5. Conclusion

References

China’s New Economic Norms

Yijiang Wang

1. Introduction
2. The Slowdown
3. Features of the New Economy
4. Concluding Remarks

The Asian Infrastructure Investment Bank and the Struggle for the East Asian International Order

Ming Wan

1. Introduction
2. The AIIB as an International Financial Institution
3. The AIIB and International Order
4. The AIIB and China
5. Recommendation

Macroeconomic Perspectives for Developed and Emerging Economies

Comments by Michael J. Roberts

1. Introduction
2. Emerging Economies
3. China 200
4. The United States

Macroeconomic Perspectives

Comments by Yoon Je Cho

1. Secular Stagnation
2. China’s Economic Slowdown
3. The Inclusion of RMB in the SDR Basket

Session 3 Finance

Strategies for Currency Convertibility: Korea’s Perspectives

Jang Yung Lee

1. Definition and Accepted Wisdom
2. Benefits and Costs of Convertibility
3. Strategies for Currency Convertibility
4. Countries’ Experiences of Convertibility
5. Conclusion and Policy Suggestions
References

Unconventional Monetary Policy, Spillovers, and Liftoff: Implications for Northeast Asia

Marcus Noland

1. Introduction
2. How We Got Here
3. Spillovers
4. Liftoff
5. Conclusions
References

Exploration of the Prospect of Cooperation between Belt and Road Initiative and TPP in Global Economic Governance

Xiaotong Shan

1. Development Philosophy and Cooperation Approach of Belt and Road Initiative
2. BRI’s Implications for the Global Economy
3. Comparison of Similarities and Differences between the Belt and Road Initiative and TPP
4. Cooperation between the Belt and Road Initiative and TPP for Global Economic Integration
5. Mutual Learning between the Belt and Road Initiative and TPP
6. A Preliminary Study on Cooperation between the Belt and Road Initiative and TPP
7. Conclusion
References

Finance Issues

Comments by Baybars Karacaovali

Session 4 Major Findings and Policy Implications

Monetary Policy Response in Emerging Economies and North Pacific Cooperation

Il Houng Lee

1. Introduction
2. Capital Flows and Impact on Emerging Markets
3. Not Always an Efficient Allocation of Capital Across Borders
4. Synchronization of Interest Rates
5. Unsynchronized Business Cycles
6. Overcoming the Limitations of Monetary Policy
7. Capital Flow Measures
8. Strengthening North Pacific Cooperation

Major Findings and Policy Implications

Comments by Taeho Bark

Conference Program
Program
Participants 

The conference was held on Dec 14-15, 2015 co-organized by the Korea Institute for International Economic Policy (KIEP) and East-West Center (EWC) in Honolulu. Participants from China, Japan, Korea and the United States discussed the economic future of the major North Pacific countries and the importance of economic cooperation among them. Major topics in each session were (1) Trade (2) Macroeconomic Perspectives and (3) Finance. The first topic, "Trade",  related to the China'a trade strategy, China's  Belt-Road Initiative, Korea's Eurasia Initiative, and the Trans-Pacific Partnership Agreement (TPP). The second topic, "Macroeconomic Perspectives", aimed to tackle global or regional economic problems through the understanding of the macreconomic  policies of the emerging market economies, uncertainty in the economic conditions of the United States, China's New Economic Norms, and the struggle of the East Asian International Order. The third topic, "Finance", aimed to provide an analytical perspective over currency convertibility, unconventional monetary policies, and prospect of cooperation between Belt-Road Initiative and TPP in the global economic governance. The conference concluded with the major  findings and policy implications from the earlier sessions, particularily, monetary policy response in emerging economies and the importance of strengthing the North Pacific cooperation were discussed.
 

 

  The emergence of China in the international financial order can be analyzed in three aspects: strengthening its position within the IMF system led by the West, establishing a new financial order through multilateral development banks (MDBs) like the AIIB and NDB, and the internationalization of the renminbi (RMB).
  China has steadily demanded an increase in its share in the IMF.
Following the effectuation of the reform plan in 2016, China became the third largest member of the IMF and the RMB is now included in the SDR basket. China also succeeded in launching the AIIB by formulating a consensus on the necessity for launching an alternative multilateral development bank in Asia where the ADB had a monopoly. On the other hand, RMB internationalization is executed based on a set of internal and external goals: stabilizing inflation and the engine for internal reform, and consolidating the international status of China. As a result, RMB settlements accounted for approximately 2% in world trade, while investment accounted for 16.6% in 2015. However, the RMB still accounts for only 0.6% of the global bond market, and only 1.1% of global foreign reserves. As such, although the internationalization of the RMB has achieved some degree of success, it is hardly keeping up with the extent to which China’s economic power is growing.
  For the China-led financial order to take root, China should continue to pursue further reforms and openness regarding free convertibility, capital accounts, and the exchange rate. China, however, is maintaining a cautious approach. Some of the reasons for this are as follow. First, there are concerns about an outbreak of financial crisis through the opening up of China’s capital account.
  Second, there are fears that there will be an increase of non-performing loans and decrease of interest rate in the event of non-interference by China’s financial authorities. As China also has tried to maintain a managed floating system and to allow capital opening only on an experimental basis, it will not be easy for it to expand its influence in the international financial market in a short period of time. Moreover, as the recent appreciation of the yuan has weakened, the impetus for internationalization of the RMB has weakened.
  The recently launched AIIB, NDB and the Silk Road Fund are financially contributing to China’s national strategy known as “The One Belt, One Road (OBOR)” initiative and the internationalization of the RMB. The AIIB and NDB are different from existing MDBs in that their establishment was mainly aimed at infrastructure investment, and that China holds a significant stake in these banks, as well as in that it plans to raise capital for these banks in yuan, and has established a quicker and easier loan procedure. It is also noteworthy that the AIIB is devoted to transportation and power infrastructure investments in countries along the Belt and Road, while the NDB focuses on renewable energy infrastructure investments in BRICS countries. SCODB, which is to be newly established, focuses on infrastructure investment in Central Asia. The Silk Road Fund, the national fund into which Chinese government bodies such as the State Administration of Foreign Exchange have invested, will act as a dependable fund for OBOR projects by swiftly and boldly making investment decisions. Since both the AIIB and NDB are MDBs, they have to go through certain procedures when reaching financing and investment decisions. However, they lack in internal capabilities such as the know-how to operate international organizations and understanding about the global infrastructure market.
  Therefore, financial support for the OBOR initiative is likely to be led by the Silk Road Fund for the time being, with the AIIB and NDB assisting. But these institutions face considerable challenges in the future, such as difficulties in finding bankable projects in Eurasia, as well as raising funds from domestic and overseas sources. The new financial order led by China will gradually become clearer if the institutions show remarkable progress, and if the internationalization of the RMB gathers momentum from the OBOR initiative.
  Meanwhile, China has realized some achievements in terms of RMB internationalization since 1997, such as the expansion of RMB settlement in world trade and the development of offshore RMB markets. The trade settlement function and the investment currency function of the RMB have also improved. Having been added to the SDR currency basket has elevated the global status of the RMB more than ever. Until recently, however, the Chinese government has prioritized economic growth and export expansion through currency depreciation rather than stabilizing the exchange rate for internationalization. Thus, China is faced with several tasks, such as minimizing the effects that the exchange rate shock accompanying RMB internationalization will have on its domestic economy, as well as responding to the disruption in the reform and opening-up policy caused by external factors, and managing prudent finance regulation and risks related to floating funds flow.
  In any case, the internationalization of the RMB is a national strategy of China, and the relevant system will be improved during its 13th Five-Year Plan. In addition, the countries along the Belt and Road are becoming increasingly clear as a key area of internationalization for the RMB, although discussions are underway to form a yuan currency bloc that will include China mainland, Hong Kong and Taiwan.
  Taking all the three abovementioned aspects together, it will be difficult for China to dramatically change the current international financial order in the short term, when taking into consideration the Chinese financial goals and internal capability, the speed of progress in AIIB’s projects, and the West’s containment policy toward China.
  Korea, however, will have to secure its own national interest by establishing mid- to long-term strategies and specific countermeasures against the new financial order, which is encapsulated in the newly launched international financial institutions and internationalization of the RMB.
  Above all, Korea needs to actively and accurately adopt a bandwagon policy, since China will carefully deal with domestic problems like insufficient financial capacity and the existing order centered on advanced countries. For example, Korea needs to evaluate and preemptively participate in institutions and organizations led by China, as it participated as a founding member of the AIIB. For this, it will be important to establish an organic cooperation system between the government and the private sector. In addition, Korea should pursue a so-called two-track strategy to lead the Northeast Asian Development Initiative while at the same time taking a proactive stance in Southeast Asia, Southwest Asia and Central Asia, where China-led financial order will be expanded. As a concrete measure, it will be necessary to prepare a plan to set up a differentiated offshore RMB hub from Hong Kong and Singapore by issuing a RMB bond through cooperation with Chinese financial institutions. Korea should take the lead in establishing the AIIB Institute and setting it up in Korea. In the mid- to long-term it needs to concentrate on establishing a Korea-led development financial institution which will focus on development in North Korea.
  The launch of the AIIB will be both a challenge and opportunity for Korea. However, the competitiveness and infrastructure market share of Korean companies are evaluated as quite low. Korean construction companies are lacking in financing capacity, technological skills, and business networks. Korean financial companies were evaluated to be lacking in financial advisory and arranging ability, deal-sourcing channels and networks, and in their track record and market reputation. Therefore, it is crucial for Korean companies to improve their competitiveness and work out strategies to expand their business globally in order to grasp business opportunities.
  The construction companies need to strengthen their competitiveness by nurturing professional manpower, enhancing their capacity to gather local information by dispatching overseas personnel, and collaborating with foreign companies. They should try to win orders for projects operated by the AIIB or included in the OBOR initiative, in both upstream and downstream sectors. The government should support the companies by lowering guarantee fees and commission, and by providing timely information on the MDB procurement market and orders.
  For the financial companies, it will be necessary to purchase the AIIB’s initial issuance of bonds, accumulate a track record through co-financing with the AIIB, and expand overseas branches in the six economic corridors of OBOR regions. In addition, they will need to reduce the risk of using guaranteed loans by K-ECA, increasing financing capability by using ODA funds, and establishing a deal sourcing channel with K-ECA. The government also must try to provide support by strengthening overseas financial cooperation, dispatching financial advisors, reorganizing diversified overseas infrastructure investment institutions, and setting up specialized funds.
  As for North Korea, it will be difficult for it to join the new order led by China since North Korea is not a member of the AIIB and the international community continues to level sanctions against it.
However, Korea should consider establishing a development financial institution (Northeast Asia Development Bank) for North Korea’s development and unification costs from a mid- to long-term perspective. Once the North Korean nuclear issue has been resolved, this institution can become a unified Korea-led development institution. It could also lead cooperation with the AIIB in Northeast Asian development, including North Korea.
  In conclusion, the China-led new financial order is still in its infancy. In terms of the OBOR initiative, projects in Southwest Asia are speeding up while projects in Southeast Asia are slowing down. This is because of the expansion of economic power and border disputes in the South China Sea, and neighboring countries are wary of the expansion of China’s influence. In the same vein, China-led financial institutions such as the AIIB and NDB are also hampered by a lack of support from neighboring countries. The internationalization of the RMB is still in its development stage, and it seems premature to discuss the RMB currency bloc, as the Chinese government might establish a more sophisticated strategy for the regional currency order to establish a considerable position in the international monetary order.
  On the other hand, there has been some controversy over the fact that Korea has become overly involved on the Chinese side by joining the AIIB. However, Korea needs to consider its national interests and actively participate in the emergence of a new financial order led by China.
  Korea should discuss policy coordination with China preemptively, especially while China remains in an uneasy situation due to its lack of international financial capability and delays in OBOR projects due to the vigilance of neighboring countries. Ensuring that Korea gains strategic value from the forming of a new financial order will correspond to our national interests. 

Executive Summary

1. Introduction

2. Measure of Inter-Industry Distance

3. The Empirical Analysis
3-1. Model Specification
3-2. Data Description
3-3. Empirical Results

4. Concluding Remarks

References

Appendix 

We propose a new measure of inter-industry ‘distance’. This is constructed a la Antras et al. (2012). While they measure the distance of an industry from its final use ？ what they call ‘downstreamness’ of an industry ？ we measure the distance between a pair of industries. Our proposed index is a measure of input-output linkages between industries that incorporates a ‘distance’ flavor. Our measure distinguishes the number of vertical production stages that an industry’s product goes through until it is finally used by another industry by assigning larger weights to the value of input use with longer production chains.
Hence our measure contains more information on the relation between two industries along the vertical production chain. We use this index to construct an aggregate measure of ‘industry connectedness’ of regions in the U.S. It measures the degree of industrial linkages of a region. We then empirically establish that each region’s labor productivity is positively associated with the ‘industry connectedness’. The result contributes to the large literature of agglomeration economies that the industrial linkage is one of the main sources of agglomeration economies and productivity growth, as emphasized by Marshall (1920). It also suggests that our index can serve as an alternative measure of the industrial linkages.

Keywords: Inter-industry Distance, Regional Growth, Input-Output Linkages
JEL Classification: F43, F63, O11
 

Acknowledgements

Notes on the Contributors

1. Study on the Marine Development Cooperation between China and South Korea
Cao Zhongxiang

Introduction

Body

Conclusions

References

2. Study on the Innovation Driven Industrial Upgrading in Korea
Sheng Chaoxun

Introduction

The Course of Industrial Upgrading Driven by Innovation and

the Main Measures of South Korea

Chinese case: The New Situation and New Characteristics of Innovation Driven Industrial Upgrading in China

Conclusions

References

3. Gravity, Borders, and the Potential for Economic Integration in the Asia Pacific: Evidence from Korea and Russia
Kiril Tochkov

Abstract

Introduction

Methodology

Data

Results

Potential Determinants of the Border Effects

Conclusions

References

4. Korea’s FTA Strategy and its Implications to China
Zhou Mi

Introduction

Body

Conclusions

References

5. Are China’s Exports Crowding Out or Coexisting with Korea’s Exports in the Arab Region?
Nashwa Mostafa Ali Mohamed

Abstact

Introduction

The Performance of Arab Imports

Determinants of Arab Imports Demand Function

Relationship between Chinese and Korean Exports towards Arab Region

The Results

References

6. Free Trade between Korea and Mexico: Obstacles and Advantages
Adolfo Alberto Laborde Carranco

Summary

Introduction

Mexico-South Korea Bilateral Relations (1960-2014)

Economic Relations between Mexico and South Korea

Conclusions

Appendix

References

Mexicon Figures

7. The Role of MIKTA: Understanding Korean and Turkish Perspectives
Selcuk Colako？lu

Introduction

MIKTA: A New Global Initiative

Conclusion

References

8. China-US Bilateral Investment Treaty (BIT)
Xu Man

Introduction

The Interest Demands of the U.S. from the China-US BIT

The Interest Demands of China from China-US BIT

Negative List as the Core Issue and Sticking Point: from the Perspective of Reform and Opening Up

Suggestions on BIT Negotiation Strategy

Conclusion

References 

In 2009, Korea Institute for International Economic Policy (KIEP) launched “Visiting Fellows Program (VFP)” with the view of advancing cross-border exchanges of knowledge, information, insights and expertise.
Since its inception, the VFP has demonstrated that sharing thoughts and ideas through face-to-face contacts and dialogue works as a catalyst for enhancing mutual understanding among scholars and professionals with diverse background.
By successfully implementing the VFP for the past 8 years, KIEP has been motivated to assume the role as a hub for international economic research in the region. As a host of the program, KIEP has many mandates. One of those tasks is to let more people know what has been accomplished through the program and how valuable it is.
In an effort to do so, KIEP has published series of research every year. This volume, the 7th of its series, contains eight research papers contributed by 2015 Visiting Fellows.
Publication owes many debts. Here I acknowledge just a few of them. First of all, I must express my deepest gratitude to the 2015 visiting fellows for their outstanding performances. My special thanks also goes to Ms. RIM Jeewoon and the staffs of the KIEP Publishing Team who worked very hard for the publication of this volume.
The views expressed in this publication are the views of the author and do not necessarily reflect the views or policies of KIEP. KIEP does not guarantee the accuracy of the data included in the publication.

 

[ 대상 ]

Financial Intermediaries, Volatility, and Cross-Border Lending: Empirical Evidence from the Euro Area
RYU DonghanㆍSON Jang Ho

Ⅰ. Introduction

II. Literature Review

III. Econometric Framework and Data Description

IV. Empirical Results

V. Conclusion

References

 

[ 우수상 ]

EU Energy Policy Agenda and European Commission: The Case Study of Energy Union Agenda-Setting Strategy
SOHN Hyodong

Ⅰ. Introduction

II. European Commission and (Energy) Policy Agenda-Setting

III. Case Study of European Commission Agenda Strategy: Energy Union

IV. Discussion and Conclusion

References

 

The KU-KIEP-SBS EU Centre, an education & research consortium sponsored by the European Commission, was established on May 2014 by three partners: Korea Institute for International Economic Policy (KIEP), Korea University, and Seoul Broadcasting System (SBS), The KU-KIEP-SBS EU Centre is dedicated to make contribution to enhancing interest in Europe and to expanding research base in EU area studies.
Therefore, the KU-KIEP-SBS EU Centre hosted “The 2nd KU-KIEP-SBS EU Centre Research Paper Competition on EU Studies” and this book includes two best papers from the competitions. The KU-KIEP-SBS EU Centre will contribute to analyzing issues on European integration, the economic and political dynamics in EU and promoting cooperation between Korea and EU through this research competition.
 

Executive Summary

Contributors

1. Introduction 

2. Korea and Global Imbalances

3. Data and Methodology

4. Decomposition of Korea’s Current Account Surplus

5. Policy Implications

6. Conclusion

References
 

Some countries have persistent current account surplus, contributing to global imbalances up to a level that is worrisome. For example, Germany has been continuously experiencing current account surpluses since 2002, amounting to 8.4% of GDP in 2015. China has never experienced current account deficits since 1997, the year that data is first available. Japan's record is even longer; its consecutive current account surplus started from 1981. Recently, Korea joined this large current-account surplus club: since the currency crisis in 1997, Korea's current account balance has been continuously in the black, expanding even more in these recent years.
  In this paper, we present an empirical methodology that explains how current account balances are determined and by employing it, try to diagnose factors that account for Korea's current account surplus. In fact, the IMF has introduced a methodology, the External Balance Assessment (EBA: Phillips et al., 2013), to assess exchange rate and current account gaps that are defined as the difference between current levels and those consistent with fundamentals. For example, the 2016 External Sector Report, by utilizing this methodology, demonstrates that Korea's real effective exchange rate in 2015 was 4 to 12 percent undervalued than the level consistent with fundamentals.
  While the IMF's EBA is a state-of-the-art methodology that incorporates major studies in the literature, we feel that it has some limitations when analyzing the movements of Korea's current account balances. The method implicitly assumes that the current account surpluses of these countries will be substantially reduced by changing the exchange rate. However, the current account surpluses of Korea cannot be explained by the exchange rate alone. After the global financial crisis, despite rapid appreciation of the real effective exchange rate, Korea's current account surplus has been continuously increasing.
  Korea experienced a currency crisis in 1998. Since then it has experienced continuous current account surpluses. The current account surpluses just after the crisis were extremely helpful for the economy to recover from the crisis. Managing a modest level of current account surpluses has also been beneficial for the economy in preventing future crises. However, Korea's current account surplus in 2015 amounted to 7.7% of GDP, causing a concern that it may be too excessive. This exorbitant reliance on external demand can esca-late political pressures from trading partners to appreciate the exchange rate. It is also argued that maintaining more balanced demand sources by giving domestic demand a greater role is essential for a sustained growth path.
  In this paper, we investigated underlying reasons as to why Korea's current account surpluses are widening. We found that the upward trend in Korea's current account surpluses is essentially explained by demographical changes it is currently experiencing. Moreover, we show that since Korea's population is rapidly aging, its current account surplus is expected to disappear by 2042 as it becomes one of the most aged economies in the world. In fact, demographical changes are so powerful that they explain quite successfully the trend of current account balances of other aged economies such as Japan, Germany, Italy, Finland and Greece as well. However, demographics do not explain cross-country differences in the level of current account balances, i.e. the high level of Korea's current account surpluses is mainly explained by a country fixed effect.
  When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, in order to reduce current account surplus by 1 percentage point, a whopping 12% depreciation is needed. Since other economic variables are yet included as explanatory variables, this can be considered to be the maximum estimate of the effect of the exchange rate changes. If it is true that Korea's current exchange rate is 4 to 12 percent undervalued than the level consistent with fundamentals, it is impossible to reduce Korea's current account surplus to a reasonable level by adjusting the exchange rate alone. Another possibility to reduce current account surplus is expanding fiscal policies. We find, however, that the impact of fiscal adjustments on current account surplus is even more limited. According to our estimates, reducing current account surplus by 1 percentage point requires a 5-6 percentage points increase in budget deficits (as a ratio to GDP).
  The above impacts of exchange rate and fiscal policy adjustments are estimated without considering the endogeneity of these policy variables. If we allow endogenous movements of these variables, the impact of exchange rate adjustment is 1.6 times larger, while that of fiscal policy decreases so that it is no longer statistically significant.
  When we add other economically fundamental variables such as GDP gap, oil prices, net foreign asset and so on, they contribute to explaining short run fluctuations without much improvement in explaining the trend nor country fixed effects. On the other hand, while the upward trend in Korea's current account surplus since 1997 is mainly explained by demographical changes, the current level of current account surplus, i.e. 7.7% of GDP, is placed quite above the fitted line derived by the economically fundamental variables including demographical changes.
  This idiosyncrasy of Korea's current account surplus seems to be related to increasing saving propensity of households especially among aged people. However, we will need further detailed analyses for more rigorous evidence to support this argument.

Executive Summary

Contributor

1. Introduction

2. Literature

3. Government Spending Policy Uncertainty Index: Construction and Evaluation

4. Econometric Method and Data

5. Results

6. Discussion

7. Concluding Remarks

Appendix

References
 

In this paper, I empirically examine the effects of uncertainty about government spending policy on economic activity using U.S. time series data. To this end, I constructed government spending policy uncertainty indexes and estimate proxy SVAR model. Proxy SVAR model with constructed indexes shows that an increase in government spending policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, the results imply that the commonly adopted recursive SVAR model in literature on policy uncertainty systematically underestimates the adverse effect of government spending policy uncertainty because of the endogeneity issue. One policy suggestion based on the empirical finding is clear announcement of future government spending path.

Keywords: Policy Uncertainty, Government Spending Policy Uncertainty Index,
Government Spending Policy Uncertainty Shock, Proxy SVAR
JEL Classification: C32, E32, E62