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Abstract | PDF (170 kilobytes)

Although capital market openness is a virtue to pursue, there are
many reasons to control capital flows. Korean monetary authorities employed
macroprudential measures after the global financial crisis (GFC). They intend
to avoid the considerable accumulation of foreign capital inflows, which potentially
causes a financial crisis in an economic downturn. Korean macroprudential
measures enlengthened the maturity of foreign currency debts. This paper analyzes
whether the macroprudential measures limit the supply of USD enough to
change the price variables. The macroprudential measures did not cause the depreciation
of the Korean won, and the Korean won’s sensitivity to market volatility
did not rise either. Although the cost of USD funding increased after the
macroprudential measures, the F/X exchange rates did not seem to react. The
interest rate arbitrage opportunity did not increase after implementing macroprudential
measures. Because the investors have not fully explored the interest
arbitrage opportunity, the increased USD funding cost of macroprudential measures
did not show up as the increased gap between the Korean won bond interest
rate and cross-currency rate. Korean monetary authorities introduced the macroprudential
measure when capital inflows resumed after the GFC. The increased
cost of USD funding did not reverse the capital inflows trend, only restructuring
them.

Abstract | PDF (190 kilobytes)

This paper introduces the concept of “robust survival” as a sufficient
condition for the existence of equilibrium in a general equilibrium model with
incomplete markets (GEI). The robust survival condition is weaker than the GEI
irreducibility condition proposed by Gottardi and Hens (1996) in the GEI model,
and it is less affected by the degree of market incompleteness. Unlike the GEI irreducibility
condition of Gottardi and Hens (1996), the robust survival condition
provides an explanation for the existence of a GEI equilibrium in which an agent
can consume with the minimum expenditure on feasible consumptions. This
condition can be used to evaluate the impact of financial innovation on the welfare
of the poor. When an economy passes the robust survival condition but fails
the GEI irreducibility condition, some agents may be “poor” in pre-innovation
equilibrium. In this case, we can apply the GEI irreducibility condition to the
post-innovation economy to determine whether financial innovation makes the
invisible hand benevolent towards the poor.

Abstract | PDF (3904 kilobytes)

The basic pension is the income support program for the elderly
whose age is no less than 65 and whose income level is less than 70% among
them. Recently, policymakers suggest raising the pension benefit from 300,000
KRW per month to 400,000 KRW per month (33%) to mitigate the high elderly
poverty ratio in Korea. This paper quantitatively assesses the long-run economic
impacts of raising the basic pension benefit by comparing two steady-state
economies. To conduct the quantitative analysis, we build the heterogeneous
agent overlapping generation model and calibrate the model to match the current
economic status. Then, we simulate the model economy with the inflated
benefit and consider various financing methods to support the enlarged program.
Because of the generous income support, the life-cycle and precautionary saving
motives are weakened, so the aggregate variables drop relative to the benchmark
economy. Our results follow. First, the aggregate employment rate falls by
1.7%p and the elderly employment rate by 7%p. Secondly, the aggregate output
drops by 3% because of the aggregate capital and labor reduction. Lastly, the
before-tax income Gini largely increases, while the after-tax income Gini falls
a little. These results quantitatively vary across different financing methods, but
they change in the same direction qualitatively.

Abstract | PDF (4918 kilobytes)

This study investigates the effects of macroeconomic shocks on
households debts and house prices, using a two-agent dynamic stochastic general
equilibrium(TANK DSGE) model with a loan-to-value ratio constraint. A
negative monetary shock increases households’ interest burden, reducing their
debts. It also decreases demands for houses among impatient households and entrepreneurs,
causing house prices to fall. A negative housing demand shock lowers
house prices and hence tightens the borrowing limit of impatient households,
inducing them to reduce debts significantly. Lastly, an inflation shock transfers
real wealth from patient households to impatient households and entrepreneurs.
This effect discourages patient households from purchasing houses, lowering
house prices. In the meantime, household debts decline because the central bank
increases the policy interest rate in response to the inflation shock, elevating interest
burden of impatient households. We find that each of these three macroeconomic
shocks reduces household debts, house prices, and the GDP.