Research

This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the effect of uncertainty on bank loans. In terms of the transmission channel of uncertainty, we find the evidence of both the real option channel and the financial channel: the negative effect is stronger for firms with a higher degree of investment irreversibility and financially constrained firms. In addition, our findings suggest that larger firms may be predominantly affected by uncertainty shocks through the real option channel rather than the financial channel. In addition, our empirical findings on firm investments align with those on bank loans.

Using a novel set of instrumental variables in a structural VAR framework, we investigate the economic impact of uncertainty shocks from geopolitical swings on the Korean Peninsula. We construct robust instrumental variables for these shocks based on high-frequency changes in financial asset returns and volatilities around the geopolitical events. Our empirical results show that heightened geopolitical uncertainty has negative impact on macroeconomic outcomes of South Korea. We provide evidence that financial and capital markets play a major role in the transmission of uncertainty shocks in a small open economy.

This paper analyzes the extent to which technology progress and youth employment are related. In doing so, we divide workers into two groups – young workers and old (prime-aged) workers - and then estimate the elasticity of substitution between (physical) capital and workers à la Jaimovich et al. (2013. “The Demand for Youth: Explaining Age Differences in the Volatility of Hours.” American Economic Review 103 (7): 3022–3044) by using the Korean labour market data between 2000 and 2014. Our findings indicate that the elasticity of substitution is greater (or at least not smaller) for young workers than for old workers. 

The unprecedented fiscal and monetary policy responses during the COVID-19 crisis have increased uncertainty about inflation. During crises periods, the strength of the transmission of inflation uncertainty shocks from one country to another tends to intensify. This paper examines empirical methodologies to measure the strength of the interdependence of inflation uncertainty between the UK and the euro area. We first estimate inflation uncertainty by expost forecast errors from a bivariate VAR GARCH model. The interdependence of uncertainty is estimated using a probability model. The results imply that the spillover of uncertainty is stronger for uncertainty about distant future than near future. The evidence from quantile regressions shows that such empirical method could suffer from bias if endogeneity is not properly addressed. To identify structural parameters in an endogeneity representation of interdependence, we exploit heteroskedasticity in the data across different regimes determined by the ratio of variances. The results no longer exhibit stronger interdependence at longer horizons. Estimated by different sample periods, the strength of the propagation of inflation uncertainty intensifies during the Global Financial Crisis while the interdependence significantly weakens during the post-crisis period. 

We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that the geopolitical risk sharply increases in the occurrence of nuclear tests, missile launches, and military confrontations, and decreases significantly around the times of summit meetings and multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and the reductions in stock returns are larger especially for large firms, firms with a higher share of domestic investors, and firms with higher ratio of fixed assets to total assets. The results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.

We examine the causal dynamic relationship between economic policy uncertainty and economic activities, using a Local Projection model with external instruments. Based on the psychological theory of conviction narratives, we construct a Relative Sentiment Shift (RSS) index and use it as an instrumental variable that captures exogenous variations in economic policy uncertainty. Our empirical results suggest that an increase in economic policy uncertainty induces recessionary pressures in the economy: reductions in production and employment, a sharp stock market downturn, and a constrained financial market. 

This paper proposes an explainable machine learning model for consumer credit scoring in Mexico, an emerging economy. We develop an extreme gradient boosting (XGBoost) model using non-traditional data from the Financial Inclusion National Survey. To address the black box problem, we explore the feature importance by estimating the Shapley values that measure the average marginal contributions across all possible subsets of features. The key drivers of consumer credit defaults include the adverse economic effects due to the COVID-19 pandemic and financial attitudes and behaviors. By exploring the distributions of the Shapley values by age and income, we find the evidence of non-linearity of the feature explanations.  

This paper proposes a measure for firm-level uncertainty using forecast disagreement among financial analysts in South Korea for the period between 2003Q1 and 2019Q4. I find that, at the aggregate level, the disagreement measure of uncertainty is positively correlated with the Economic Policy Uncertainty (EPU) and negatively correlated with GDP growth, both with lags. To investigate the real option channel of uncertainty, the impact of firm-level uncertainty on investment is estimated, controlling for firm-level first-moment shocks and financial conditions. The results suggest that the firm-level disagreement measure of uncertainty adversely affects the investment and such effects are more severe for firms with high levels of irreversible investments. There is empirical evidence suggesting that the impacts on other real activities are consistent with the real option theory---sales, employment and investment in R&D are discouraged by uncertainty shocks. Financial decisions of firms are affected by firm-level uncertainty shocks---firms reduce debt and increase payout when faced by higher uncertainty. 

In the aftermath of the global pandemic, a number of countries will have to contend with debt burdens, possibly too large for them to manage. In the third section, this paper tackles the high levels of public and private sector debt in Asia and ways to address it. Chapter 8 explores how for some of the Pacific island countries, the balancing act among ensuring pandemic recovery, rebuilding fiscal buffers, and investing in climate resilience may prove too much. Given the history of weak growth and the likelihood of further exogenous shocks, debt relief or debt reduction for highly indebted and highly vulnerable Pacific Island economies may be required. Such relief could free up resources for crucial social spending on health, education, and social protection and help to catalyze an improvement in public debt management. 

The paper focuses on the cross-border network analysis of banking flows. In particular, we would like to answer how the global network has developed in the Asia-Pacific region and how important is South Korea as a financial intermediary in the region. We construct a dataset for cross-border interbank flows of South Korea between 2005Q2 and 2018Q1 and examine the network structure before, during and after the Global Financial Crisis. The aim of this chapter is to identify potential roles of financial network on cross-border interbank flows and to draw important policy implications. 

This study outlines a detailed overview of the structural changes in the Asia-Pacific region from the 1990s onwards, and we also review the most relevant literature on this important topic. The second part of the paper then provides the descriptive analysis of the financial structures in the region including the role of the G7 countries, Luxembourg and Switzerland. The following chapters in this volume then focus on the specific characteristics of the individual countries with deeper insights about their financial structures.