Journal of Economics and Management Strategy, Feb 7, 2017
This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechan... more This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each firm's fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.
This paper investigates a link between the significant decline in the growth of domestic demand a... more This paper investigates a link between the significant decline in the growth of domestic demand and the dampened ripple effects from the export sector in Korea since the East Asian financial crisis. The dampened ripple effects are closely linked to the changed investment behaviors of the Korean large-sized exporting firms since the crisis: they do not invest in their export earnings any more to create new industries; they tend to use more foreign value added contents for their exports and to increase outward direct investment by actively participating in global value chains. The paper also examines a link between the growth of domestic demand and the growth of household disposable income and presents reasons for the decline in the growth of household disposable income since the East Asian financial crisis.
B E Journal of Economic Analysis & Policy, Oct 1, 2014
Designated driver service in Korea offers a convenient and affordable solution for drunk drivers ... more Designated driver service in Korea offers a convenient and affordable solution for drunk drivers to reach their destinations with their own vehicles. We investigate the influence of this service availability on drunk driving behaviors, using Korean panel data from 1998 to 2011. We find that an increase in designated driver firms significantly reduces both alcohol-involved and total traffic fatality rates, while the effects of well-known deterrence policies are weak. This result is further supported by a counterfactual analysis which compares the effect of the service on traffic fatality rates in daytime to those in nighttime when the rate of the service use is substantially higher.
This paper examines the persistence of relative consumer price indices for 15 regions in Korea in... more This paper examines the persistence of relative consumer price indices for 15 regions in Korea including 6 metropolitan cities and 9 provinces over the period of 1990-2016. In particular, we ask if relative regional price indices contain a common stochastic trend and find that they are not. We then investigate how quickly these relative prices converge to their long run value and find that a half-life of a deviation from the long run value is in the range of 13 to 22 months for the aggregate consumer price indices and in the range of 7 to 13 months for the tradable goods price indices, which is much quicker than the estimates of previous studies. These estimates suggest that existing monetary models with the realistic duration of price rigidities can generate the persistence in relative price indices.
The forward discount puzzle refers to the robust empirical finding that foreign excess returns ar... more The forward discount puzzle refers to the robust empirical finding that foreign excess returns are predictable. We investigate if expectations errors are the main cause of this predictability using the serial dependence pattern of excess returns implied by economic models as identification device. This approach also allows us to explain why strong predictability of excess returns only occurs during 1980s. Using USD bilateral spot and forward rates from 1975-2009, we show that both the statistically significant positive serial dependence of excess returns in the entire sample and the very weak (mostly insignificant) positive serial dependence in the subsample excluding observations in 1980-87 are consistent with the predictions of the expectations errors explanation. We provide several pieces of new empirical evidence which support the link between the strong predictability in the 1980s and changes in forecasting techniques by foreign exchange market agents.expectations errors, rational expectations risk premium, excess returns, serial dependence, 1980-87.
This paper examines the persistent properties of 12 sectoral relative prices between Korea and Ja... more This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.
This paper shows the possibility that the estimates from foreign exchange return regressions cont... more This paper shows the possibility that the estimates from foreign exchange return regressions contain huge noise which makes it difficult to extract useful information about the predictability of foreign excess returns, in particular, if exchange rates are generated from a typical present value model with a near unity discount factor. The main reason is that the present value model induces a large bias in the estimation of the regressions accompanied by a high variability of the estimates. We also confirm that the volatility and persistence of both the spot return and the forward premium generated from the present value model are consistent with data.
This paper empirically investigates the effects of exchange rate shocks on the variables of the p... more This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.
This paper investigates the effects of an increase in minimum wages on wage inequality and gender... more This paper investigates the effects of an increase in minimum wages on wage inequality and gender pay gap in APEC economies using unbalanced economy-level panel data from 1990 to 2017. We estimate both linear and quadratic models of the effective minimum wage, while controlling for macroeconomic variables that could affect wage inequality as well as gender pay gap. The increase in the minimum wage has the effect of alleviating the wage inequality at the lower-tail of the wage distribution. The effect is much greater for women than for men, which contributes to reducing gender pay gap. On the other hand, the rise in the minimum wage does not affect the wage inequality at the upper-tail of the wage distribution for both women and men.
This paper shows the possibility that the estimates from foreign exchange return regressions cont... more This paper shows the possibility that the estimates from foreign exchange return regressions contain huge noise which makes it difficult to extract useful information about the predictability of foreign excess returns, in particular, if exchange rates are generated from a typical present value model with a near unity discount factor. The main reason is that the present value model induces a large bias in the estimation of the regressions accompanied by a high variability of the estimates. We also confirm that the volatility and persistence of both the spot return and the forward premium generated from the present value model are consistent with data.
This paper examines persistent behavior of deviations from purchasing power parity (PPP) construc... more This paper examines persistent behavior of deviations from purchasing power parity (PPP) constructed using consumer price indices and nominal exchange rates for APEC member economies over the period of 1981-2015. In particular, we ask if these deviations tend to converge to their long run equilibrium value. For this, we consider three different sample periods of 1981-2015, 1997-2015, and 1981-1996. We find that the panel unit root test rejects the unit root hypothesis that a deviation from PPP does not converge to its long run value for the period of 1997-2015 but does not reject it for the other two periods. We then investigate how quickly this deviation converges to its long run value and find that a half-life of a deviation from PPP is 5.7 quarters, which is much quicker than the estimates of 3 to 5 years reported by previous studies. This result is consistent with the argument that globalization and advancement in transportation and information technology significantly contribute to lowering trade barriers among APEC member economies.
This paper empirically investigates the effects of exchange rate shocks on the variables of the p... more This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.
This paper examines the persistent properties of 12 sectoral relative prices between Korea and Ja... more This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.
Journal of Economics and Management Strategy, Feb 7, 2017
This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechan... more This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each firm's fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.
This paper investigates a link between the significant decline in the growth of domestic demand a... more This paper investigates a link between the significant decline in the growth of domestic demand and the dampened ripple effects from the export sector in Korea since the East Asian financial crisis. The dampened ripple effects are closely linked to the changed investment behaviors of the Korean large-sized exporting firms since the crisis: they do not invest in their export earnings any more to create new industries; they tend to use more foreign value added contents for their exports and to increase outward direct investment by actively participating in global value chains. The paper also examines a link between the growth of domestic demand and the growth of household disposable income and presents reasons for the decline in the growth of household disposable income since the East Asian financial crisis.
B E Journal of Economic Analysis & Policy, Oct 1, 2014
Designated driver service in Korea offers a convenient and affordable solution for drunk drivers ... more Designated driver service in Korea offers a convenient and affordable solution for drunk drivers to reach their destinations with their own vehicles. We investigate the influence of this service availability on drunk driving behaviors, using Korean panel data from 1998 to 2011. We find that an increase in designated driver firms significantly reduces both alcohol-involved and total traffic fatality rates, while the effects of well-known deterrence policies are weak. This result is further supported by a counterfactual analysis which compares the effect of the service on traffic fatality rates in daytime to those in nighttime when the rate of the service use is substantially higher.
This paper examines the persistence of relative consumer price indices for 15 regions in Korea in... more This paper examines the persistence of relative consumer price indices for 15 regions in Korea including 6 metropolitan cities and 9 provinces over the period of 1990-2016. In particular, we ask if relative regional price indices contain a common stochastic trend and find that they are not. We then investigate how quickly these relative prices converge to their long run value and find that a half-life of a deviation from the long run value is in the range of 13 to 22 months for the aggregate consumer price indices and in the range of 7 to 13 months for the tradable goods price indices, which is much quicker than the estimates of previous studies. These estimates suggest that existing monetary models with the realistic duration of price rigidities can generate the persistence in relative price indices.
The forward discount puzzle refers to the robust empirical finding that foreign excess returns ar... more The forward discount puzzle refers to the robust empirical finding that foreign excess returns are predictable. We investigate if expectations errors are the main cause of this predictability using the serial dependence pattern of excess returns implied by economic models as identification device. This approach also allows us to explain why strong predictability of excess returns only occurs during 1980s. Using USD bilateral spot and forward rates from 1975-2009, we show that both the statistically significant positive serial dependence of excess returns in the entire sample and the very weak (mostly insignificant) positive serial dependence in the subsample excluding observations in 1980-87 are consistent with the predictions of the expectations errors explanation. We provide several pieces of new empirical evidence which support the link between the strong predictability in the 1980s and changes in forecasting techniques by foreign exchange market agents.expectations errors, rational expectations risk premium, excess returns, serial dependence, 1980-87.
This paper examines the persistent properties of 12 sectoral relative prices between Korea and Ja... more This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.
This paper shows the possibility that the estimates from foreign exchange return regressions cont... more This paper shows the possibility that the estimates from foreign exchange return regressions contain huge noise which makes it difficult to extract useful information about the predictability of foreign excess returns, in particular, if exchange rates are generated from a typical present value model with a near unity discount factor. The main reason is that the present value model induces a large bias in the estimation of the regressions accompanied by a high variability of the estimates. We also confirm that the volatility and persistence of both the spot return and the forward premium generated from the present value model are consistent with data.
This paper empirically investigates the effects of exchange rate shocks on the variables of the p... more This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.
This paper investigates the effects of an increase in minimum wages on wage inequality and gender... more This paper investigates the effects of an increase in minimum wages on wage inequality and gender pay gap in APEC economies using unbalanced economy-level panel data from 1990 to 2017. We estimate both linear and quadratic models of the effective minimum wage, while controlling for macroeconomic variables that could affect wage inequality as well as gender pay gap. The increase in the minimum wage has the effect of alleviating the wage inequality at the lower-tail of the wage distribution. The effect is much greater for women than for men, which contributes to reducing gender pay gap. On the other hand, the rise in the minimum wage does not affect the wage inequality at the upper-tail of the wage distribution for both women and men.
This paper shows the possibility that the estimates from foreign exchange return regressions cont... more This paper shows the possibility that the estimates from foreign exchange return regressions contain huge noise which makes it difficult to extract useful information about the predictability of foreign excess returns, in particular, if exchange rates are generated from a typical present value model with a near unity discount factor. The main reason is that the present value model induces a large bias in the estimation of the regressions accompanied by a high variability of the estimates. We also confirm that the volatility and persistence of both the spot return and the forward premium generated from the present value model are consistent with data.
This paper examines persistent behavior of deviations from purchasing power parity (PPP) construc... more This paper examines persistent behavior of deviations from purchasing power parity (PPP) constructed using consumer price indices and nominal exchange rates for APEC member economies over the period of 1981-2015. In particular, we ask if these deviations tend to converge to their long run equilibrium value. For this, we consider three different sample periods of 1981-2015, 1997-2015, and 1981-1996. We find that the panel unit root test rejects the unit root hypothesis that a deviation from PPP does not converge to its long run value for the period of 1997-2015 but does not reject it for the other two periods. We then investigate how quickly this deviation converges to its long run value and find that a half-life of a deviation from PPP is 5.7 quarters, which is much quicker than the estimates of 3 to 5 years reported by previous studies. This result is consistent with the argument that globalization and advancement in transportation and information technology significantly contribute to lowering trade barriers among APEC member economies.
This paper empirically investigates the effects of exchange rate shocks on the variables of the p... more This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.
This paper examines the persistent properties of 12 sectoral relative prices between Korea and Ja... more This paper examines the persistent properties of 12 sectoral relative prices between Korea and Japan obtained following the Classification of Individual Consumption according to Purpose (COICOP) over the period of 1985-2016. Applying a new econometric method developed by Pesaran which controls for the cross-section dependence in a panel, we are not able to reject the hypothesis that the sectoral real exchange rates contain a common stochastic trend. On the other hand, the well-known panel unit root tests such as the IPS and LLC tests widely used by previous studies strongly reject the unit root hypothesis. Since the error term of the regression for our panel exhibits significant cross-section dependence, these opposite results justify that the use of the new econometric method is appropriate.
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