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Working Papers

Publications

  • A Study on the Effects of Multinational Production  on Global and Domestic Value..
    A Study on the Effects of Multinational Production on Global and Domestic Value Chains Following Trade Restructuring and Corresponding International Economic Policies

    Emphasizing foreign affiliates amid stagnant global value-chained trade, this study provides important evidence for measurable policies which should be taken dependent on the level of GVCs integration in shaping international trad..

    Myoung Shik Choi and Hun Dae Lee Date 2022.08.26

    Industrial structure, Free trade

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    Summary
    Emphasizing foreign affiliates amid stagnant global value-chained trade, this study provides important evidence for measurable policies which should be taken dependent on the level of GVCs integration in shaping international trade flows and multinational production activity. The recent decreased share of value-added exports within gross exports represents characteristics of a wider value chained network. It is common not only for firms to increase their economic activities globally but also for oversea affiliates to operate as the linchpin between the international and domestic parts of value chains. Our findings suggest that foreign affiliate activity strengthens domestic value chains, thereby leading to the outcome of further growth in the host country, while domestic affiliate activity abroad strengthens global value chains which spur growth in the broader world economy. 

    Based on empirical discussions centered on participating in GVCs, OECD high-income countries significantly integrated into GVCs will benefit from upgrading their GVCs policies such as capturing value-added in exports and building new technology or innovation. There is also a need to continue enforcing the domestic linkages of MNE affiliates, which contributes to growth and employment as they contract and cooperate with domestic firms. In addition, low-income countries not fully integrated into GVCs in the Asia-Pacific region may need to secure entry into existing GVCs with trade liberalization, while middle-income countries which have secured entry into GVCs may focus on enhancing competitiveness by increasing productivity and developing regional economic integration through forums like APEC.   
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  • COVID-19 and the Health of Banking  Sector in Japan and South Korea: A Comparati..
    COVID-19 and the Health of Banking Sector in Japan and South Korea: A Comparative Study

       1. The economies of Japan and South Korea are dominated by banks. Both countries have created a complex financial structure, including a well-established banking industry at their heart that supports economic operatio..

    Munim Kumar Barai Date 2022.07.30

    Financial policy, Financial system

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    Content
    Executive Summary

    1. Introduction

    2. Structure of Banking Systems in Japan and South Korea
    2.1 Japan
    2.2 Korea

    3. Literature Review
    3.1 A Review of the Japanese Banking System
    3.2 A Review of the Korean Banking System

    4. Objectives and Methodology of the Study

    5. Monetary Policy of BOJ and BOK Since 2010

    6. Covid-19 and the Banking Health of Japan and South Korea
    6.1 Portfolios of Banks in Japan and South Korea
    6.2 Productivity of Assets and Stockholders’ Equity (ROA and ROE)
    6.3 Profitability of Japanese and Korean Banks
    6.4 Operating Efficiency

    7. Banking Health in Pre-and Interim Period of Covid-19: A Comparative Analysis
    7.1 Comparative Portfolios of Banks
    7.2 Productivity of Banks
    7.3 Efficiency Ratios and NPAs of Banks
    7.4 Profitability

    8. Conclusion and Policy Recommendations

    References

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    Summary
       1. The economies of Japan and South Korea are dominated by banks. Both countries have created a complex financial structure, including a well-established banking industry at their heart that supports economic operations. However, both countries’ banking sectors have previously faced crises such as the Asian Financial Crisis (mostly in South Korea), the Japanese economic slowdown, and the financial crisis of 2007-08 (both). While the Bank of Japan (BOJ) approved the quantitative easing (QE) monetary policy and lowered interest rates to manage the crises, the Bank of Korea (BOK) pursued interest and financial restructuring as well as banking system digitization to overcome the crises. Covid-19 has disrupted the normal operation of banks, and the central banks and governments of both countries have implemented a variety of monetary and other measures to mitigate its economic and financial consequences.
       2. This study aims to identify and assess the health of domestic banks in Japan and South Korea for the Covid-19 ex-ante and interim periods. Several important variables, i.e., portfolios of assets and liabilities, asset productivity, stockholders' equity, profitability, and operating efficiency, have been included to evaluate the health of their banks. This compari-son of health metrics for 2010 to 2020 could help identify changes or shifts in the banking sector of Japan and Korea. The study has used ex-ploratory and descriptive methodologies to undertake qualitative and quantitative evaluations of important bank health indicators in the ex-ante and interim periods of Covid-19. It also used a hybrid method to produce research goals and arguments, including a framework based on what was already known in the field.
       3. Japanese banks are divided into four clusters, i.e., City Banks, Regional Banks I, Regional Banks II, and Trust Banks. The City Banks and Trust Banks clusters feature the largest banks, while the other clusters include smaller regional banks with a regional banking concentration. Despite being a large financial institution, Japan Post Bank is not considered a commercial bank in Japan. In Korea, Commercial and specialized banks are the two categories of banks. National and local banks make up the domestic commercial banks. The principal business of special banks is banking too.
       4. Throughout the timeframe of our investigation, the BOJ and BOK de-ployed monetary policy measures to influence bank conditions. In April 2013, the BOJ used an easy money policy, or QE, for the second time under Abenomics to combat chronic deflation and the rolling-recession effects of the 2007-08 GFC. Under QE-2, which is continuing, the BOJ has been influencing financial markets through interest rates, loan and fund support programs, and market purchases of assets of various du-rations. Starting in January 2016, the BOJ announced a negative interest rate of -0.1 percent on all new deposits. As a response to Covid-19, the BOJ gave institutions extra financial help at a low-interest rate of 0.1 percent and continues to purchase ETFs, J-REITs, JGBs, corporate bonds, etc. Due to QE-2 asset purchases, the BOJ’s balance sheet has grown by more than $5 trillion. BOK, for its part, used the bank rate as a primary policy tool to influence the money supply through bank lend-ing in the 2010s to mitigate the effects of the GFC of 2007–2008. The key interest rate was reduced from 5.25 percent in the third quarter of 2008 to 2.75 percent in the first quarter of 2013. Simultaneously, the sec-tor underwent structural restructuring to boost digitization. However, BOK adopted a more flexible monetary policy approach in response to the poor domestic economic development caused by the Covid-19 epi-demic. BOK also raised the limit on the Bank Intermediated Lending Support Facility to ₩35 trillion and made the Corporate Bond-Backed Lending Facility (CBBLF) a safety net for businesses, banks, and non-bank financial organizations.
       5. Figures show that the total assets of Japanese banks increased continu-ously, albeit at varied rates, from 2010 to 2019, never falling below 2 per-cent. The increase in bank loan amounts, from ¥8 trillion in 2012 to ¥543.9 trillion in 2021, explains some of the banks’ asset expansion. The loan portfolio breakdown reveals increased bank engagement in the real estate and housing sectors. Real estate has the highest industry share of outstanding loans, accounting for roughly 81 percent of all bank loans in 2020. Before Covid-19, both new consumer and home loans fell. Overall, portfolios of commercial banks did not undergo any significant rebalancing after QE-2. Their stockholdings fluctuated, and corporate bond holdings decreased, but t stock holdings climbed. In contrast to the BOJ's expectations, banks saw a significant increase in JGB purchas-es in FY 2020–21. Except for deposits, the effects of QE-2 and Covid-19 on banks’ liabilities were minimal. Their loan-to-deposit ratio has worsened, with loans accounting for only 66.2 percent of deposits in 2021, a record high during the pandemic. Throughout the period 2011 to 2020, the asset growth lines of Korean domestic banks shifted fre-quently. On the other hand, bank assets have been increasing since 2017, with assets reaching ₩2,977.6 trillion in 2020, up 10.6 percent from 2019. Most of the growth in banks’ assets came from borrowers’ loans and securities holdings, presently hovering around 70 percent. Between 2011 and 2020, the loans stayed higher than the deposits. In 2020, the overall liabilities of banks in South Korea were larger than the country’s GDP.
       6. Japanese banks had relatively low net earnings against their assets in terms of productivity, resulting in a poor return on assets (ROA). The highest ROA for all clusters of banks, both individually and collectively, was recorded in FY 2013-14. However, their ROA dropped in 2016-17 and 2019-2020. Nevertheless, Japanese banks earned a much higher ROE than their ROA. However, in 2020–2021, the overall bank ROE increased to 3.96 percent. Since 2010, the ROE of Regional Banks I and II has been lower than that of other banks. For Korean banks, the high-est ROA was in 2011, at 0.81 percent, and the lowest in 2016, at 0.11 percent. Banks’ ROA dropped dramatically in 2019 and 2020. Korean banks’ return on equity peaked in 2011 (9.81 percent) and troughed in 2016 (1.37 percent). In the year 2020, Covid-19 had a low ROE of 5.54 percent.
       7. Japanese banks’ ordinary profits peaked at 7.39 percent in 2014 and have steadily declined. However, the operational profit data from 2015 to 2020 has formed a U-shaped curve, indicating recent improvement. At the same time, banks' net incomes were significantly lower than their op-erating profits. QE-2 is perceived to be the significant underlying factor for their low NIs. When Covid-19 was at its most disruptive, however, the rate of net income increased to 1.84 percent in 2020, up from 1.11 percent the year before. In contrast, Korean banks had a difficult year in 2016, with NI falling by 43.18 percent from the previous year. However, net income improved over the next two years. Nonetheless, their net in-come has fallen since 2018, declining to ₩11 trillion in 2020.
       8. The efficiency of Japanese banks has remained low for a long time. From 2011 to 2021, none of the Japanese bank clusters met even the less strict efficiency standard of 60%. Even though Covid-19 might the-oretically cut operational expenses, Japanese banks’ overall efficiency ra-tio in 2021 was 83.9 percent. We are constrained by the Korean banks’ operational efficiency data. However, available data for 2020, the year of the COVID-19 outbreak, shows that most of them maintained an effi-ciency ratio of 60% or less.
       9. Since 2012, Japanese banks have reduced the percentage of non-performing loans to total loans. Between 2012 and 2020, however, the ratio fell from 2.4 to 1.1 percent. Due to Covid-19, the NPL ratio went marginally up to 1.2 percent in 2021. At the same time, Korean banks had significantly lower NPL ratios than Japanese banks. All banks’ total NPL was 0.25 percent of their loans in 2020. Banks in Japan and Korea are well-capitalized, evidenced by their good CARs. However, Japanese banks are better positioned with a higher ratio of CAR. The net interest margins (NIM) index clearly shows that Korean banks do better than their Japanese counterparts. However, in 2019 and 2020, the profitability index of Japanese and South Korean domestic banks fell.
       10. Despite their differences, the study revealed that Korean domestic banks could sustain better health indicators than their Japanese counterparts for much of the study period. Banks in Japan are trying to maintain bet-ter financial health with the ultra-low interest rates imposed by the QE-2 monetary policy. During Covid-19, the profitability and efficiency of the sector have been adversely affected. In contrast, Korean banks had the advantage of higher interest rates. They maintained a better degree of ef-ficiency, while their low nonperforming loans provided them with man-agerial strength, though Covid-19 seems to have marginally impacted their efficiency, profitability, and performance.

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  • Consumer Responses to Price Shocks of Wine Imports in Korea
    Consumer Responses to Price Shocks of Wine Imports in Korea

    The main purpose of the study is to develop a methodology that divides consumers' responses to FTAs or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for some specific goods. The use..

    Chul Chung et al. Date 2021.07.30

    Trade policy, Free trade

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    Content
    Executive Summary

    1. Introduction

    2. Literature Review
    2-1. Research on the Effects of FTAs and Consumption in Korea
    2-2. Research on Demand Analysis

    3. Methodology

    4. Empirical Analysis
    4-1. Data
    4-2. Empirical Results

    5. Conclusion

    References
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    Summary
    The main purpose of the study is to develop a methodology that divides consumers' responses to FTAs or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for some specific goods. The use of unit values as a dependent variable for consumers' qualitative choice, unlike the usual method of utilization of unit values as a proxy variable for market prices, showed that qualitative response to price changes exists and its size is significant. The methodology of separating and estimating qualitative responses to income changes as in economic crises is also presented, and the empirical analysis using this methodology showed that much of the existing income effects were qualitative responses. As a key result, the price elasticity of -1.178 estimated by the usual demand model based on a single commodity assumption is reduced to -0.712 for the quantitative margin only, and the qualitative margin is the remaining -0.466, accounting for more than a third of the overall response. The significant degree of qualitative response estimates suggests that policy makers and researchers should consider qualitative response as an important factor when analyzing the effectiveness of FTAs, especially on consumption.
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  • A Theoretical Approach to Evaluating Global Vaccination Plans
    A Theoretical Approach to Evaluating Global Vaccination Plans

    We study a game-theoretic model in which there are two periods of time in each of which agents (players) make a vaccination decision, and they choose the level of economic activities. In addition, we consider two kinds of policy m..

    Youngseok Park and Sangjun Yea Date 2021.03.31

    Economic cooperation, International security

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    Content
    Executive Summary 

    1. Introduction 

    2. Model 

    3. Subgame-Perfect Nash Equilibrium 

    4. Government Policies 

    5. Conclusion 

    References 
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    Summary
    We study a game-theoretic model in which there are two periods of time in each of which agents (players) make a vaccination decision, and they choose the level of economic activities. In addition, we consider two kinds of policy measures 1) a vaccination passport policy and 2) a subsidy policy to promote vaccination, and compare the social welfare in each case. We find that introducing a vaccine passport policy or subsidizing to mitigate the expected costs from vaccination may decrease the social welfare when a vaccine is effective to reducing the extent of severeness of illness from virus infection but not successful in curbing the transmissibility of virus.
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  • Determinants of Korean Outward Foreign Direct Investment: How Do Korean Firms Re..
    Determinants of Korean Outward Foreign Direct Investment: How Do Korean Firms Respond to the Labor Costs of Host Countries?

    Low cost of labor has been one of the major incentives that foreign firms invest in many developing countries. Yet, many developing countries including China and ASEAN have recently experienced a rapid increase in labor costs. Usi..

    Hanbyul Ryu and Young Sik Jeong Date 2020.09.01

    Labor market, Foreign direct investment

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    Content

    1. Introduction 


    2. Literature Review


    3. Data and Summary Statistics


    4. Empirical Analysis 


    5. Main Results 
    5-1. Wage Trends 
    5-2. Asian Developing Countries
    5-3. Developed Countries 


    6. Conclusion 


    References

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    Summary

    Low cost of labor has been one of the major incentives that foreign firms invest in many developing countries. Yet, many developing countries including China and ASEAN have recently experienced a rapid increase in labor costs. Using the wage information provided by JETRO, this study examines how Korean FDI outflow is affected by the increase in labor costs of the manufacturing industry in host countries. The results indicate that the worker’s and engineer’s wages in Asian developing countries, who accumulated at least 3 and 5 years of work experience, have generally a negative impact on Korean FDI outflow. However, there exist positive relationships between the wages and FDI when the wages stay at very low levels. We do not find evidence that labor costs make a significant impact on Korean FDI outflow to European or Developed countries.
     

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  • Bargaining and War: On the Communication Equilibrium in Conflict Games
    Bargaining and War: On the Communication Equilibrium in Conflict Games

    We present a version of Baliga and Sjostrom’s (2012a) conflict games with two asymmetric players. The players contemplate whether to take an active engagement action to compel the leader of a neighboring state (an extremist) to g..

    Youngseok Park and Colin Campbell Date 2020.08.10

    Political Economy, International security

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    Content

    Executive Summary 


    1. Introduction


    2. The Conflict Game with Two Asymmetric Players 
    2.1 The Conflict Game with Cheap-Talk Communication 
    2.2 Effective Cheap-Talk Communication 
    2.3 Ineffective Communication
     
    3. Discussion 


    References 

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    Summary

    We present a version of Baliga and Sjostrom’s (2012a) conflict games with two asymmetric players. The players contemplate whether to take an active engagement action to compel the leader of a neighboring state (an extremist) to give up his risky weapons. We show that a player with greater damage from the extremist is more likely to choose an active engagement action than a player with lesser damage. Furthermore, we examine cheap-talk communication equilibria with the extremist. The likelihood of both players choosing the active engagement action decreases by a hawkish extremist who can send a provocative message, if both players are coordination types. If both players are opportunistic types, a dovish extremist can send an appeasement message that causes one player to be more active while another to be more inactive. Lastly, we show that there does not exist any other communication equilibrium for either kind of extremist, for any other combination of player types.
     

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  • Defined Contribution Funded Social Security and Labor Supply: Focus on Mexican S..
    Defined Contribution Funded Social Security and Labor Supply: Focus on Mexican Social Security Reform in 1997

    Countries adopting a defined benefit pay-as-you-go (DB PAYG) regime have two options to solve the issue of financial unsustainability: (1) a parametric reform, which alters policies within DB PAYG regime, and (2) a structural r..

    Sungwoo Hong Date 2020.07.03

    Labor market, Tax system

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    Content

    Executive Summary

    1. Introduction

    2. Mexican Social Security Reform in 1997

    3. Data

    4. Identification Strategy

    5. Results

    6. Conclusion

    References

    Appendix 

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    Summary

    Countries adopting a defined benefit pay-as-you-go (DB PAYG) regime have two options to solve the issue of financial unsustainability: (1) a parametric reform, which alters policies within DB PAYG regime, and (2) a structural reform, which changes the regime from DB PAYG to a defined contribution funded (DC) system. In this study, focusing on the structural reform of Mexico in 1997, I investigate whether structural social security reform affects labor supply. The findings suggest that the change in the social security regime increased both labor force participation and work hours per week. However, in the case of the elderly, the intensive margin effect on labor supply was not statistically significant.


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  • Global Financial Imbalance: Firm-level Evidence from Korea
    Global Financial Imbalance: Firm-level Evidence from Korea

      Since the global financial crisis, low interest rates have continued throughout the world. However, financial imbalance has deepened as much of the expanded investment during low interest rates did not lead to increased pro..

    Tae Soo Kang et al. Date 2020.05.15

    Business management, Capital market

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    Content

    Executive Summary
     
    1. Introduction


    2. Literature Review 


    3. International Comparison 
    3-1. Marginal Company 
    3-2. Share of Marginal Companies
    3-3. Relationship between Marginal Share (10+) and Monetary Policy-Related Interest Rate


    4. Determinant for Marginal Companies in Korea: 2013-2018
    4-1. Data 
    4-2. Empirical Methodology 
    4-3. Empirical Results 


    5. Conclusion 


    References

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    Summary

      Since the global financial crisis, low interest rates have continued throughout the world. However, financial imbalance has deepened as much of the expanded investment during low interest rates did not lead to increased productivity. This study focused on the increase of marginal firms as a result of the adverse effects of financial imbalances on firms. The marginal firms were identified based on the company's financial statement, and the share of marginal firms by country was compared and analyzed using Worldscope data. As a detailed analysis on the marginal firms, the impact of borrowing interest rate on the possibility of becoming a marginal company was analyzed in the case of Korea with KED data. According to the international comparison, East Asia including Korea, China and Japan has shown a lower share of marginal companies than Europe, South Asia and Latin America. Empirical results through Panel Logit with Sector Fixed Effect Model show that the borrowing rate has a negative correlation with the probability the company will become a marginal company in the case of Korea. However, the impact of an increase in borrowing rates on the likelihood of becoming a marginal company depends on the degree of financial vulnerability. Specifically, an increase in the borrowing rate has a greater impact on the possibility to become ICR<1 in the companies with higher financial vulnerability indexes.
     

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  • Trump Tariff and Firm Relief: Winners and Losers from Steel Tariff Exclusion Req..
    Trump Tariff and Firm Relief: Winners and Losers from Steel Tariff Exclusion Request

       On March 2018, the Trump administration introduced 25 percent tariffs on steel and 10 percent tariffs on aluminum imports. To minimize the adverse effects of these tariffs to downstream US producers who import these p..

    Yeo Joon Yoon and Wongi Kim Date 2020.03.16

    Trade policy, Free trade

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    Content

    Executive Summary 


    1. Introduction 


    2. The Exclusion Request 


    3. Data and Estimation 
    3-1. Data 
    3-2. Model Specification and Estimation 


    4. Estimation Results 
    4-1. Main Results 
    4-2. Additional Analysis


    5. Concluding Remarks


    References 

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    Summary

       On March 2018, the Trump administration introduced 25 percent tariffs on steel and 10 percent tariffs on aluminum imports. To minimize the adverse effects of these tariffs to downstream US producers who import these products, the exclusion request that grants tariff exemptions has been also established. In this paper we examined the determinants of the authority’s decisions on the exclusion requests. Our analysis focuses on the political factors. Specifically, we ask whether companies operating business in states where Trump won the majority vote (Trump state) in the 2016 presidential election were more likely to get tariff exemptions. Our estimation result suggests that firms located in Trump states were more likely to be granted exemptions. Especially it appears that the decisions were made based on a dual standard. While firms with lower sales to employment ratios were more likely to be approved for the exclusion requests in Trump states, it was the opposite for firms in non-Trump states.
     

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  • How Does Protectionist Trade Policy Interact with FDI?
    How Does Protectionist Trade Policy Interact with FDI?

    In this study, we investigate the question whether importing countries’ implementation of protective trade measures, such as antidumping duties, leads to changes in foreign direct investment from trading partners. That is, we exa..

    Jongduk Kim and Moonhee Cho Date 2019.12.30

    Anti-dumping system, Overseas Direct Investment

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    Content

    Executive Summary

    1. Introduction


    2. Analysis

    2-1. Identification Strategy

    2-2. Data


    3. Results

    3-1. Import-restricting Measures

    3-2. Antidumping Measure as an FDI Determinant

    3-3. Robustness Check


    4. Concluding Remarks


    References


    Appendix

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    Summary

    In this study, we investigate the question whether importing countries’ implementation of protective trade measures, such as antidumping duties, leads to changes in foreign direct investment from trading partners. That is, we examine the prevalence of “ADP-jumping FDI” across countries. We use more recent and organized non-tariff measure data provided by the WTO I-TIP and Ghodsi et al. (2017), which can be matched with other trade-related variables. Using econometrically sensible identification strategies, the Tobit and the Heckman two-stage selection models, we find out that ADP-jumping FDI to importing countries prevails rather consistently around the world. These results are also consistent with those using Poisson and linear fixed effects models.

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