This paper estimates the volatility of the won-dollar exchange rate during the 2008-9 crisis. We find that the volatility increased in September 2008 and decreased in May 2009. The volatility rose gradually for one month and subdued in a similar manner, which implies that the volatility was not governed by any specific event or government policy. The overall changes in the volatility are similar to the movements of the CDS premium. We also find that the UK foreign exchange market experienced a similar pattern of volatility shifts and suffered smaller but longer volatility than the Korean one. The volatility shifts are estimated using a Markov switching GARCH model and a Bayesian method is suggested.Keywords: Bayesian Inference, Markov Switching GARCH Models, Exchange Rate Volatility, Credit CrisisJEL classification: C11, C22, F31(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe Korean foreign exchange market has experienced two crises during the last two decades, as shown in Figure 1. The exchange rate was managed by the government before the Asian financial crisis in 1997-8. The Korean currency, or the won, depreciated sharply during the crisis and showed a trend of appreciating during the next decade. The foreign exchange market suffered from another foreign capital flight during the global credit crisis in 2008-9. Contrary to the case of the 1997-8 crisis, the 2008-9 credit crisis stemmed from the developed economies. However, the credit crisis led many developing countries, including South Korea, to an economic or financial crisis. Many policies were implemented to stabilize the financial and foreign exchange markets in Korea. The Bank of Korea has swiftly lowered the policy rate from 5.25% to 2% for 4 months since October 2008. The government announced the Financial Market Stabilization Measures, which included government warrants of the foreign currency debt of the commercial banks and provision of dollar liquidity to them, on October 19, 2008. The Bank of Korea has also made a 30-billion US dollar swap arrangement with the Federal Reserve on October 30, 2008 and other deals with the People's Bank of China and the Bank of Japan on December 12, 2008. From October 2008 to February 2009, it provided around 30-billion dollar liquidity to financial institutions which had difficulties in overseas fund raising.This paper estimates the volatility of the won-dollar exchange rate during the 2008-9 crisis and investigates what determined the volatility. We find that the volatility increased in September 2008 and decreased in May 2009. The volatility rose gradually for one month and subdued in a similar manner, which suggests that the volatility was not governed by any specific event or government policy. The overall changes in the volatility are similar to the movements of the CDS premium. We also find that the dollar-pound exchange rate experienced a similar pattern of volatility shifts to that of the won-dollar exchange rate. But, the UK foreign exchange market suffered smaller but longer volatility than the Korean one.Since the Autoregressive Conditional Heteroskedastic (ARCH) model was suggested by Engle (1982), the conditional heteroskedastic models have been updated and developed to analyze the volatility of the financial markets. Researchers, including Bollerslev (1986), generalized the ARCH model to GARCH (generalized ARCH) and its variants, such as IGARCH, GARCH-M, and EGARCH. The models are known to describe well the many features of volatility, such as volatility clustering and the leverage effect.1 However, as Schwert (1990) and Engle and Mustaffa (1992) show, the GARCH models imply too much persistence in the conditional variance. To overcome this shortcoming, Cai (1994) and Hamilton and Susmel (1994) incorporate the Markov switching component into the ARCH model. Gray (1996) and Dueker (1997) generalize their model to Markov switching GARCH (hereafter, MS-GARCH) models. …

Basu and Van (1998) present a fundamental framework of child labor with two important axioms: the luxury axiom and the substitution axiom. A number of empirical studies, however, reveal a i°wealth paradoxi±. The current paper has two aims. First, it develops a model that provides an explanation for i°the wealth paradoxi± in light of the luxury axiom and the substitution axiom. Second, it helps understand the relationship between the luxury axiom and the substitution axiom.

Former officials in business are often blamed for abusing their connections to the government to distort public policy to their advantage. This paper examines the extent of rents to former officials by analyzing subsidy allocation among state-owned enterprises in Korea. Defining connected CEOs as former members of the National Assembly or government officials, I have estimated the effects of connected CEOs on attracting government subsidies. Substantial replacement of CEOs after the change of political leadership, a unique feature of state-owned enterprises of Korea, helps cleaner identification than other related studies relying only on cross-sectional variations. The empirical evidence is consistent with a hypothesis that connected CEOs are more likely than others to attract state subsidy. This relationship seems stronger in case of CEOs from the relevant offices and weaker when the competing recipients have strong connections. Given the data limitation, however, part of the estimated effects may come from expertise rather than connections especially for former bureaucrats.

Some recent empirical studies found positive effects of economic liberalization on democratization. Based on these findings, this paper explains why the sequence of economic liberalization and democratization is related to the effects of the two reforms on economic performance. Since economic liberalization increases the probability of democratization and democratization leads to income redistribution, in an economy with large inequality between the elite and the poor, the elite do not implement economic liberalization, and democratization occurs first. In such an economy, the effects of economic liberalization and democratization are lower because of distortions caused by large-scale income redistribution.

The efficiency wage hypothesis is introduced and a work effort function is specified in which labor productivity depends on the distribution of income between wages and profits and the general level of output. The function is then incorporated in a structuralist-Keynesian growth model in which investment decisions depend on income distribution, inflation and the level of output. A ‘conflict theory of inflation’ is then developed in which wage and price change depend on real income aspirations and the rate of employment. It is, then, shown that changes in income distribution exert a direct effect, via aggregate demand, and an indirect effect, via work effort, on output and inflation. The two separate effects may be complementary or contradictory. The direction and magnitude of the overall impact on inflation and growth depends on institutional factors, such as the specification of the effort function, the different savings propensities, the determinants of capital accumulation and the state of income distribution.

We estimate price and income elasticities of demand for green coffee beans in panels of up to 40 countries, both during and after the operation of export quotas under International Coffee Agreements. The dynamic panel estimator proposed in Han and Phillips (2007) is used because it is a consistent estimator, for any length of panel, regardless of the presence of unit roots. Dynamic panel data models, of any type, do not seem to have been previously applied to coffee demand. We find evidence of a concave relationship between income and coffee consumption for countries which are members of the International Coffee Organization, but no evidence of such a relationship for other countries. A further conclusion is that measures which increase the price of coffee beans can be expected to have little effect on coffee sales.

The paper investigates the causes of Africai¯s poor growth performance. It therefore focuses on the strand of literature that highlights the role of policy instability and uses the dependent economy model as the main theoretical framework. Results from the empirical work indicate that public spending instability increases real exchange rate instability, which in turn exerts a negative impact on both investment and total factor productivity. Further, the empirical investigation suggests partially that real exchange rate appreciation contributes to the decline of sectors with important positive externalities, thereby leading to persistent productivity losses and weak economic growth.

By constructing a panel dataset from nine OECD countries for the period 1971-1999 and adopting up-to-date panel cointegration estimation methods, the paper shows the robustness of long run positive relationship between inward foreign direct investment and productivities of host countries. Especially, with group mean fully modified OLS, the estimation model allows common time dummies to control possible cross-sectional dependence and also allows heterogeneous cointegrating vectors for the members of cross section. The paper also confirms the long run equilibrium relationship between domestic knowledge stocks and productivities in G7 countries.

The objective of this paper is to evaluate the effects at the industry level of public investment in transportation infrastructures in Portugal. The empirical results are based on VAR/ECM models for the Portuguese economy and for eighteen industries covering the whole spectrum of economic activity in the country. These models consider private-sector output, employment and investment as well as public investment. Empirical results at the aggregate level indicate that public investment has a positive effect on both private inputs as well as on private output and that it affects labor productivity positively. These aggregate results, however, hide a wide variety of industry-level effects. In absolute terms, the industries that benefit the most from public investment are Construction, Trade, Transportation, Finance, Real Estate, and Services. In turn, relative to their size, the industries that benefit the most are Mining, Non-Metal Products, Metal Products, Construction, Restaurants, Transportation, and Finance, and, therefore, public investment tends to shift the industry mix toward these industries. Accordingly, our empirical results suggest that although public investment has been a powerful instrument to enhance the long-term economic performance in Portugal it does so in a way that is rather unbalanced across industries.