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Policy Reference
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Korea's FTA Policy: Focusing on Bilateral FTAs with Chile and Japan
A free trade agreement (FTA) eliminates tariffs and alleviates non-tariff barriers (NTBs), stimulating trade for member nations while limiting imports from non-member nations at the same time. In an effort to avoid the negative ef..
Inkyo Cheong Date 2002.09.05
Trade policy, Free tradeDownloadContentExecutive Summary
I. Introduction
II. Background of Korea's FTA Policy
III. Current Progress of Korea's FTAs
1. Korea-Chile FTA
2. Korea-Japan FTA
3. FTAs with Other Nations
IV. A Korea-Chile FTA: Korea's First FTA?
V. Expected Effects of a Korea-Japan FTA
VI. Conclusion
ReferencesSummaryA free trade agreement (FTA) eliminates tariffs and alleviates non-tariff barriers (NTBs), stimulating trade for member nations while limiting imports from non-member nations at the same time. In an effort to avoid the negative effects of exclusion from such agreements, to maintain economic reform and an open policy, and to actively cope with proliferating regionalism, the Korean government has decided to pursue FTAs with other nations. Forming FTAs will enable Korea to create political allies, attract foreign investment, and establish overseas footholds, as well as allow Korean companies to secure foreign export markets and overcome discriminatory practices under other FTAs. (The rest is omitted.) -
A Dynamic Analysis of the Korea-Japan Free Trade Area: Simulations with the G-Cubed Asia-Pacific Model
The discussion of an FTA between Korea and Japan began in 1998 and led many research institutions to conduct studies on the economic effects of the FTA. The most prominent one is a joint study between the Korea Institute for Inter..
Warwick J. McKibbin et al. Date 2002.08.15
Free tradeDownloadContentSummaryThe discussion of an FTA between Korea and Japan began in 1998 and led many research institutions to conduct studies on the economic effects of the FTA. The most prominent one is a joint study between the Korea Institute for International Economic Policy (KIEP) and Japan's Institute of Developing Economies (IDE), which was commissioned by the governments of Korea and Japan. (The rest is omitted.) -
Trade Integration and Business Cycle Co-movements: the Case of Korea with Other Asian Countries
As Korea increases its trade within Asia, it is becoming more and more integrated with the other economies in the region. Theoretically, increased trade can lead business cycles across trading partners to be patterned in either di..
Kwanho Shin et al. Date 2002.08.10
Trade structureDownloadContentExecutive Summary
I. Introduction
II. Trade Patterns and Business Cycle Co-Movements
III. Data and Statistical Findings
IV. Methodology and Results
V. Policy Coordination and Business Cycle Co-Movements
VI. Conclusion
ReferencesSummaryAs Korea increases its trade within Asia, it is becoming more and more integrated with the other economies in the region. Theoretically, increased trade can lead business cycles across trading partners to be patterned in either direction, towards convergence or divergence. By using the data for twelve Asian economies, this paper finds that intra-industry trade is the major channel by which the business cycle of Korea becomes synchronized with that of other Asian economies, although increased trade itself does not necessarily lead to close business cycle coherence. -
Korea's FDI Outflows: Choice of Locations and Effect on Trade
According to a formal model for choice of locations for Korea's FDI stock, market size and growth in real GDP significantly cause a positive effect on location of FDI, while the real GDP per capita and distance variables turn out ..
Chang-Soo Lee Date 2002.07.05
Overseas direct investmentDownloadContentExecutive Summary
I. Introduction
II. Literature Review
III. Determinants of FDI Outflows
IV. FDI's Effect on Trade: Empirical Test
V. Summary and Concluding Remarks
Appendix. FDI Outflows in 1991-1994 and 1997-1999
ReferencesSummaryAccording to a formal model for choice of locations for Korea's FDI stock, market size and growth in real GDP significantly cause a positive effect on location of FDI, while the real GDP per capita and distance variables turn out to cause negative effects on FDI. In particular, the negative effect of real capita GDP on FDI implies that Korean overseas production has little relation to high-income consumers and products. We can find changes in patterns of choice of location after the Asian financial crisis; in the early 1990s, the motivation behind FDI was to seek low cost labor in declining industries, but by the late 1990s, the main factor driving FDI was the globalization of businesses in the large conglomerate sector. In addition, the insignificance of human capital abundance, technology level and tax rates means that institutional and policy-related variables such as transparency and pro-FDI policy might be more important than those variables. (The rest is omitted.) -
Hanging Together: Exchange Rate Dynamics between Japan and Korea
Japan and Korea are close countries in terms of economic interaction as well as geography. To quantify the impact of changes in the yen/dollar exchange rate and Japanese industrial production on the Korean economy before and after..
Sammo Kang et al. Date 2002.06.25
Economic cooperation, Financial crisisDownloadContentExecutive Summary
I. Introduction
II. Economic Interdependence between Japan and Korea
1. Co-movement of the Business Cycles
2. Co-movement of Exchange Rates
III. Empirical Tests
1. Some Basic Statistical Relations
2. Stationarity Test and VAR Impulse Response Analysis
3. Variance Decomposition
IV. Conclusions
Appendix
ReferencesSummaryJapan and Korea are close countries in terms of economic interaction as well as geography. To quantify the impact of changes in the yen/dollar exchange rate and Japanese industrial production on the Korean economy before and after the crisis in 1997, the sample period is divided into two sub-periods and then the causal relationships are examined by using vector autoregression analysis. Our estimates show that while the response of Korean industrial production to changes in the yen/dollar exchange rate is not significant during the pre-crisis period, it becomes significant during the post crisis-period. The forecast error variance decomposition also confirms that the yen/dollar exchange rate shocks have almost negligible explanatory power with regards to Korean industrial production during the pre-crisis period, but they have some significance for the post-crisis period. These empirical results show that the free floating exchange rate regime adopted since the crisis cannot insulate the Korean economy from external nominal shocks such as the yen/dollar exchange rate shocks. -
Interdependent Specialization and International Growth Effect of Geographical Agglomeration
New economic geography theory predicts a catastrophic agglomeration of economic activities in the sense that income inequality among countries or regions is inevitable. However, such a result relies heavily on the assumptions that..
Soon-Chan Park Date 2002.05.30
Economic development, Economic integrationDownloadContentExecutive Summary
I. Introduction
II. A dynamic geography model
III. Intermediate Analysis
IV. Centripetal and Centrifugal Forces
1. Growth rate in the steady state
2. Growth effect and specialization
3. Income inequality
V. Stability Analysis
VI. Growth and Income in the Steady States
VII. Economic Integration
VIII. Concluding Remarks
References
AppendixSummaryNew economic geography theory predicts a catastrophic agglomeration of economic activities in the sense that income inequality among countries or regions is inevitable. However, such a result relies heavily on the assumptions that economic activities are independent of each other. In this paper, a two-country three-sector model is developed, encompassing new economic geography theory and endogenous growth theory. Unlike the previous economic geography literature, we construct a model in which the three sectors are interdependent. Several interesting results are obtained from small changes in the model setting. (The rest is omitted.) -
Who Gains Benefits from Tax Incentives for Foreign Direct Investment in Korea?
Tax incentives for FDI in Korea have been extended after the financial crisis of 1997. With the newly implemented tax incentives, foreign investors have been able to reduce the tax burden of their Korean business activities. Howe..
Seong-Bong Lee Date 2002.04.15
Overseas direct investmentDownloadContentExecutive Summary
I. Introduction
II. Tax Incentives for Foreign Direct Investment in Korea
A. Legal Sources of Tax Incentives for FDI in Korea
B. Contents of Tax Incentives for FDI in Korea
III. Who Gains Benefits from Tax Incentives for FDI in Korea?
A. Greenfield or M&A Investments?
B. Tax Treaty Beneficiary or Not?
C. Investment through Permanent Establishment or Not?
D. Double Taxation Relief on Dividends: Exemption or Foreign Tax Credit?
E. Tax Sparing System Beneficiary or Not?
IV. Conclusions
A. Tax Strategies for Foreign Investors
B. Policy Implications for the Korean Government
ReferencesSummaryTax incentives for FDI in Korea have been extended after the financial crisis of 1997. With the newly implemented tax incentives, foreign investors have been able to reduce the tax burden of their Korean business activities. However, not all foreign investors receive the same level of tax benefits. (The rest is omitted.) -
New Evidence on High Interest Rate Policy During the Korean Crisis
The paper evaluates the effectiveness of the high interest rate policy in stabilizing the exchange rate during the Korean crisis, based on a nonlinear impulse response function approach. By tracing impulse responses within an esti..
Se-Jik Kim et al. Date 2002.03.25
Financial crisis, Financial policyDownloadContentExecutive Summary
I. Introduction
II. Empirical Methodology
1. SNP Estimation of the Conditional Density
2. Impulse Response Analysis of Nonlinear Models
III. Data
IV. Main Empirical Results
V. Evaluation of the IMF's High Interest Rate Policy
VI. Conclusion
ReferenceSummaryThe paper evaluates the effectiveness of the high interest rate policy in stabilizing the exchange rate during the Korean crisis, based on a nonlinear impulse response function approach. By tracing impulse responses within an estimated model, we find that high interest rates induce depreciation for a very short period (five days), followed by a substantial appreciation for an extensive period (more than three months). In contrast, a low interest rate policy would appreciate the exchange rate only for a very short period but have little impact afterwards, indicating an asymmetry in the exchange rate response to an interest rate shock. The impulse function analysis also suggests that a cutback of interest rates to the pre-crisis level does not cause serious depreciation. Our findings suggest that the IMF's interest rate policy in Korea, which was characterized by a sharp increase in interest rates at the onset of the crisis followed by a cutback after several months, contributed to the stabilization of the exchange rate. -
A Framework for Exchange Rate Policy in Korea
This paper proposes that interest rate policy be used to attain a flexible inflation target.Flexibility in this context means that the authorities also care about short-run fluctuations in domestic output and employment. The less ..
Michael Dooley et al. Date 2002.03.15
Financial policy, Exchange rateDownloadContentExecutive Summary
I. Introduction
II. Policy Challenges
1. The Current Account, Net Debt and Capital Flows
2. Volatility
3. Exports
4. The Optimal Stock of Gross Reserves
5. A Safety Valve, Concerted Intervention
III Inflation Targeting
1. Overview
2. Credibility and Inflation Targeting
IV Alternative Intermediate Regimes
V. The Currency Board Arrangement
1. Overview
2. Traditional Challenges
3. The Gains from Currency Unions and Boards
4. A Currency Board for Korea?
VI. Recent Experience in Korea and other Emerging Markets
1. Intervention and Policy Objectives
VII. Concluding Remarks
References
AppendixSummaryThis paper proposes that interest rate policy be used to attain a flexible inflation target.Flexibility in this context means that the authorities also care about short-run fluctuations in domestic output and employment. The less powerful policy tool, sterilized intervention in the foreign exchange market, would be used to limit day to day changes in exchange rates.
We argue that the government should continue to be an important participant in the foreign exchange market but not attempt to establish a level for the exchange rate. Our proposal will involve intervention that is triggered by exchange rate volatility but constrained by an announced target for the government's overall net foreign asset position. The objective of this regime is to allow the government to participate in the foreign exchange market in a way that contributes to economic stability and promotes the development of the private sector's participation in foreign exchange and financial markets. -
A Guide for SMEs Exchange Rate Risk Management
Korea adopted free floating exchange rate system after the crisis in 1997, resulting in increased exchange rate risk for small and medium-sized enterprises. A small open economy such as Korea is vulnerable to outside shocks, in pa..
KIEP Date 2002.02.28
Exchange rateDownloadContentSummaryKorea adopted free floating exchange rate system after the crisis in 1997, resulting in increased exchange rate risk for small and medium-sized enterprises. A small open economy such as Korea is vulnerable to outside shocks, in particular, world interest rate shocks, exchange rate shocks and foreign productivity shocks. Therefore, this study seeks to help promote the understanding of CEOs on the management of exchange rate risk.