Ju Hyun Pyun

Does Trade Integration Contribute to Peace

We investigate the effect of trade integration on interstate military conflict. Our empirical analysis, based on a large panel data set of 243,225 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace. It also suggests that the peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflict. More importantly, we find that not only bilateral trade but global trade openness also significantly promotes peace. It shows, however, that an increase in global trade openness reduces the probability of interstate conflict more for countries far apart from each other than it does for countries sharing borders. The results also show that military conflict between countries significantly reduces not only bilateral trade interdependence but also global trade integration. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the natural and geopolitical characteristics of dyads of states that may influence the probability of military conflict and for the simultaneous determination of trade and peace.

International Portfolio Diversification and Multilateral Effects of Correlations

Not only are investors biased toward home assets, but when they do invest abroad, they appear to favor countries with returns more correlated with home assets. Often attributed to a preference for familiarity, this ‘correlation puzzle’ further reduces effective diversification. However, a multi-country DSGE model of portfolio choice makes clear that the effects of a bilateral stock return correlation must be studied in the context of the full covariance structure. For example, the attractiveness of a foreign country as a hedge depends upon its hedging potential relative to other potential destination countries. This paper develops a new empirical approach based upon a multi-country theoretical model that controls for the full covariance structure in a theoretically rigorous yet tractable manner. Estimation under this approach overturns the correlation puzzle, and finds that international investors do seek the diversification benefits of low cross-country correlations as theory would predict. Since covariances are central to modern theories of portfolio choice, this empirical methodology should be useful also for other applications.

Capital and Credit Market Integration and Real Economic Contagion During the Global Financial Crisis

This study investigates the role of financial integration in the spread of the global financial crisis. In particular, this study shows how the effect of the crisis on real business cycle co-movement varied for capital and credit market integration, using a sample of 58 countries in 2001–2013. During the global financial crisis, the United States — the epicenter of the crisis — experienced a severe downturn in the real economy, and other countries followed suit. We find that during the global financial crisis, the business cycle co-movements between the United States and the rest of the world were stronger when the level of capital market integration between them was higher. However, the co-movements were weaker when the level of credit market integration was higher. These findings are robust even when including investment channels, local fundamental factors, endogenous policy responses across countries, and alternative measures for financial integration and business cycle co-movements.

International reserves for emerging economies: A liquidity approach

The massive stocks of foreign exchange reserves, mostly held in the form of U.S. T-bonds by emerging economies, are still an important puzzle. Why do emerging economies continue to willingly loan to the United States despite the low rates of return? We suggest that a dynamic general equilibrium model incorporating international capital markets, characterized by decentralized trade and U.S. T-bonds as facilitators of trade, can provide one possible resolution to this question. Declining financial frictions in these over-the-counter (OTC) markets would generate rising liquidity premium on U.S. T-bonds, thereby causing low U.S. real interest rates. Meanwhile, the superior liquidity properties of the U.S. T-bonds would induce recipients of foreign investments, namely emerging economies, to hold more liquidity, that is U.S. T-bonds, in equilibrium. The prediction of our model is confirmed by an empirical simultaneous equations approach considering an endogenous relationship between OTC capital inflows and reserve holdings.

Does Real Exchange Rate Depreciation Increase Productivity?: Analysis Using Korean Firm-Level Data

We examine the effects of real exchange rate (RER) depreciation shocks on firm productivity. Using the firm†level data of Korean manufacturing industries for 2006–13, we distinguish between yearly RER movement and persistent RER depreciation during 2007–09 and analyse how each affects productivity. We find the positive effect of RER depreciation on productivity among exporters, and this positive effect increases with higher export exposure. However, the positive productivity gain disappears when the depreciation persists. Our findings suggest that while immediate depreciation leads to productivity upgrade via price competitiveness and scale expansion, persistent depreciation nullifies the productivity gain by slackening the innovation effort.

International Reserves for Emerging Economies: A Liquidity Approach

The massive stocks of foreign exchange reserves, mostly held in the form of U.S. T-bonds by emerging economies, are still an important puzzle. Why do emerging economies continue to willingly loan to the United States despite the low rates of return? We suggest that a dynamic general equilibrium model incorporating international capital markets, characterized by decentralized trade and U.S. T-bonds as facilitators of trade, can provide one possible resolution to this question. Declining financial frictions in these over-the-counter (OTC) markets would generate rising liquidity premium on U.S. T-bonds, thereby causing low U.S real interest rates. Meanwhile, the superior liquidity properties of the U.S. T-bonds would induce recipients of foreign investments, namely emerging economies, to hold more liquidity, that is U.S. T-bonds, in equilibrium. The prediction of our model is confirmed by an empirical simultaneous equations approach considering an endogenous relationship between OTC capital inflows and reserve holdings.

Net Equity and Debt Flows to Emerging Market and Developing Economies in the Post-Crisis Era

ABSTRACT We investigate the determinants of net equity and debt flows into 60 emerging and developing countries during 1986–2012, with a special focus on the period following the onset of the global financial crisis (GFC). Our results controlling for endogeneity show that net equity flows to emerging markets were mostly influenced by global risk factors, while net debt flows were affected by country-specific factors. We further distinguish the factors that were more pronounced in determining net portfolio flows to emerging markets since the GFC. The US real interest rate had significant spillover effects on net equity flows after the GFC. An increase in country’s domestic credit attracted net debt inflows before the GFC, while it was associated with net equity outflows after the GFC. We also find that capital controls moderated net debt flows since the GFC.

(Asymmetric) trade costs, real exchange rate hedging, and equity home bias in a multicountry model

There has been controversy between (two‐country) theory and the empirics about whether hedging against real exchange rate fluctuations in the goods market influences foreign equity holdings. This study reconciles the theory with the empirics by introducing a multicountry framework with asymmetric trade costs. We find that the incentive to hold foreign equities to hedge real exchange rate risk is negligible because multiple trade partners act as a hedging channel for real exchange rate fluctuations. Further, our theory calls for a countrys covariance–variance ratio to be constructed as the sum of the bilateral covariance–variance ratios of the multiple partners. The empirical analysis of 24 advanced countries confirms the theoretical prediction.

North Korea's economic integration and growth potential

This paper analyzes the future growth potential of the North Korean economy, conditional on economic reform and integration with South Korea. The growth projections based on crosscountry evidence show that, if North Korea embarks on substantial policy reforms toward a market-oriented and open economy, it could achieve higher economic growth in the long run. Using an empirical gravity model of trade and direct investment, we forecast that, when the two Koreas pursue economic integration and cooperation without military conflicts, North Korea’s trade with South Korea can increase significantly, that is, up to 36 percent of North Korea’s gross domestic product (GDP) and its foreign direct investment (FDI) flows from South Korea up to 6 percent of GDP. Overall, by promoting trade and FDI integration with South Korea, North Korea can boost its GDP growth by about 3 percentage points per year. Combined with a market-oriented reform, which can bring an additional boost to GDP growth, the North Korean economy could grow by about 4.7 percent per year over the next decades. Conversely, if more rigid sanctions imposed on North Korea become effective, its trade and investment will decrease and its GDP growth rate is expected to fall by approximately 2 percentage points per year.

Ricardian Equivalence and Sovereign Default Risk

We study the impact of sovereign default risk on the private–public savings offset. Using data on 80 countries for the period 1989–2010, we find robust evidence for a U-shaped pattern in the private–public savings offset in foreign currency sovereign credit ratings. While Ricardian Equivalence holds approximately at intermediate levels of sovereign solvency, it breaks down at very low and very high levels of sovereign default risk. In particular, the U-shaped pattern is an emerging market phenomenon as well as confirmed by external public debt, but not domestic public debt. A key result is that in the presence of foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers as the present value of saved future taxes outweighs their wealth loss on bond holding. Thus, in times of high default risk, consumers appear to anticipate that the government would rather dilute bondholders than repay sovereign debt using higher taxes.