Abstract | PDF (470 kilobytes)

For the purpose of explaining both business cycles and asset returns, we examine a real business cycle (RBC) model with habit-augmented preferences and endogenous costs of adjusting the capital stock. Following the agency-cost model of Carlstrom and Fuerst (1997), capital adjustment costs are affected by the level of entrepreneurs net worth such that an increase in net worth (following a positive productivity shock) lowers agency costs associated with external financing, and hence makes it easier to expand the capital stock. Along with the restricted labor supply, the model resolves the asset pricing puzzles of the consumption-based model in the sense that the implied stochastic discount factor (or pricing kernel) reaches the Hansen-Jagannathan (1991) volatility bound. Further, this improvement in the asset pricing dimension is achieved without reducing its business cycle performance such as output and consumption volatility. This is in a sharp contrast to the standard RBC model with the reduced-form adjustment cost technology where sufficiently low supply elasticity of capital (or persistently high capital adjustment costs) is required to generate the equity premium at the expense of low output volatility. Here, the capital supply is highly elastic with respect to Tobin's q under the plausible calibrations of the structural parameters affecting endogenous capital adjustment costs. The sluggish behavior of net worth, as a shifter of the capital supply curve, is the key mechanism by which capital adjustment is delayed, hampering consumption smoothing desired by households with habit persistence preferences. The agency-costs model reveals that a small curvature in the capital adjustment cost function, viewed as crucial for understanding the fluctuations in Tobin's q, can be also consistent with both the historical equity premium and the key business cycle facts.

Abstract | PDF (473 kilobytes)

This paper analyzes temporal variations in the productivity performance of the Chinese economy at the regional level. Specifically, the focus is on regional disparity and regional temporal movement of productivity. It applies a stochastic frontier model to the Chinese provincial input-output panel data of 30 different regions over the period of 1993-2003. The empirical results confirm those of previous studies that Shanghai is the most productive economy in China and the eastern region is the best performer in productivity. Our analysis indicates that the gap between the eastern region and other regions(central, and western) is quite substantial, but the western region has made relative fast enough improvements of its efficiency to be able to narrow the gap with the eastern. This may have come about as a result of government investment in infrastructure and in social facilities such as education and health care, stimulating the performance of the less developed provinces.

Abstract | PDF (865 kilobytes)

This paper analyzes the dynsmics and determinants of disequilibrium error in the covered interest parity (CIP) thrpough the transformed error correction model following Kim and Park (2008), Kim (2008, 2009), Kim and Park (2008) and Kim (2009). According to the dynamic analyses including impulse response analyses and Granger causality test, I found the CIP disequilibrium error may be mainly caused not by the foreign exchange rate part but by the domestic and foreign interest part. However the dynamic effect of the CIP error to the interest rates and exchange rates was not meaningful. These results imply that there may be restrictions to hinder the arbitrage transaction to clear the CIP disequilibrium quickly. A restriction to this direction is the credit risk of Korean financial market and any policy reaction to reduce it may be necessary. For instance, any effort to inform the sound fundamentals of Korean economy in the international financial markets may be useful.

Abstract | PDF (721 kilobytes)

This study develops a simple dynamic stochastic general equilibrium model with collateral constraints to explore the implications of liquid assets for business cycles and asset prices. In the presence of heterogeneity in liquidity between collateral asset types, not only the value of asset holdings but also their composition affects borrowing capabilities in the future, which is to be reflected in the forward-looking optimal decisions of creditconstrained entrepreneurs. Hence the substitutions between assets and changes in liquidity premium are entailed in the course of economic fluctuations, suggestive of non-neutral effects from introducing the liquid assets into the economy with only illiquid assets. The quantitative analyses for the model economy indicate that this asset heterogeneity in liquidity can enhance the existing credit cycle models in matching the moments for amplification and persistence. Further, it is noted that the present model can generate counter-cyclical liquidity premium which is quite close to the historical average without drastic parameterization.