Abstract | PDF (704 kilobytes)

This study develops Factor-Augemented Vector Auto-Regression (FAVAR) Model to analyze monetary policy transmission mechanism in Korea for the period from 1990s, in which inflation targeting is adopted and the short-term interest rate is used as the main policy instrument. Some drawbacks of simple VAR models are discussed first, and then FAVAR model is developed to overcome the drawbacks. Monetary policy transmission mechanism can be inferred more efficiently and consistently by using FAVAR model since FAVAR model allows to use information from a large number of variables and to analyze the responses of a large number of variables simultaneously.

Abstract | PDF (553 kilobytes)

Use of the likelihood ratio (LR) statistic is examined to test for the mixture assumption of geometric distributions. As the asymptotic null distribution of the LR statistic is not a standard chi-square due to the fact that there are a boundary parameter problem and a nuisance parameter not identified under the null, we derive it separately and also provide a method to obtain the asymptotic critical values. Further, the finite sample properties of the LR test are evaluated by Monte Carlo simulations by examining the levels and powers of the LR test. Finally, using Kennan's (1985) strike data in labor economics, we conclude that unobserved heterogeneity is present in the data, which cannot be captured by specifying a geometric distribution.

Abstract | PDF (558 kilobytes)

We present a unified framework to solve the endogeneity problem in time-series regression models with serially a correlated disturbance term with ARMA($p$,$q$) dynamics. Our focus is on the case in which lagged regressors are used as instrumental variables. The control function approach provides us with the solution to the problem. Besides, it provides us with an easy method for testing for endogeneity. Our Monte Carlo experiments confirm that the proposed two-step estimation procedure and the proposed test of endogeneity perform well for a sample size as small as 250.

Abstract | PDF (514 kilobytes)

We construct a labor-barter economy under search friction, introducing quality heterogeneity and information asymmetry into the economy. Under this environment, we examine the welfare effect of a sorting device. The main modifications to the standard sorting model are that i) an agent's type is endogenously determined by his optimal behavior and ii) rejecting trade is an option available for agents, so a ``lemon market'' problem may possibly emerge. Our findings are as follows: First, sorting can prevent the labor market from collapsing even under a serious information asymmetry by providing a more favorable condition for good-type workers. Second, sorting has a positive welfare effect, as opposed to the standard sorting models, by disciplining bad-type workers and encouraging trade. Finally, introducing a sorting device can significantly reduce the equilibrium unemployment rate by alleviating the informational friction and creating a positive externality, which prevents a possible coordination failure caused by that friction.