Working Papers
Growth, export externalities and accumulation of foreign reserves, Job Market paper [draft]
Previous papers have argued that countries accumulate foreign reserves in order to deteriorate terms of trade to increase welfare. On the other hand, the optimal tariff theory argues that tariffs can increase the welfare of a country by improving its terms of trade. This paper provides a plausible explanation for the different foreign reserves policies regarding terms of trade. I build an endogenous growth model of a small open economy with technological spillovers generated from exports. Internalizing the growth effects from these externalities, the government decides whether to accumulate foreign reserves or to borrow from abroad. This paper finds that when the export externalities are large enough, it is optimal to hold positive foreign reserves to achieve faster growth through terms of trade deterioration. However, when the export externalities are small, the combined effects from the consumption smoothing motivation and better terms of trade outweigh the growth effects of exports, so the government holds negative foreign reserves.
Previous papers have argued that countries accumulate foreign reserves in order to deteriorate terms of trade to increase welfare. On the other hand, the optimal tariff theory argues that tariffs can increase the welfare of a country by improving its terms of trade. This paper provides a plausible explanation for the different foreign reserves policies regarding terms of trade. I build an endogenous growth model of a small open economy with technological spillovers generated from exports. Internalizing the growth effects from these externalities, the government decides whether to accumulate foreign reserves or to borrow from abroad. This paper finds that when the export externalities are large enough, it is optimal to hold positive foreign reserves to achieve faster growth through terms of trade deterioration. However, when the export externalities are small, the combined effects from the consumption smoothing motivation and better terms of trade outweigh the growth effects of exports, so the government holds negative foreign reserves.
Sovereign spread movements in emerging economics: terms of trade matter, with Jorge Mondragon [draft]
We propose a stochastic general equilibrium model of sovereign default with endogenous default risk in order to explain the interest rate behavior in emerging economies. We incorporate two types of shocks to cover a foreign and a domestic uncertainty. We define as the domestic and the foreign uncertainty, GDP and terms of trade shock, respectively. The model is able to successful increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade is a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.
We propose a stochastic general equilibrium model of sovereign default with endogenous default risk in order to explain the interest rate behavior in emerging economies. We incorporate two types of shocks to cover a foreign and a domestic uncertainty. We define as the domestic and the foreign uncertainty, GDP and terms of trade shock, respectively. The model is able to successful increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade is a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.
Publication (work prior to grad school)
Testing for habit formation theory and relative income hypothesis by using subjective well-being, with KiSeok Hong
Journal of Social Science 38(3), 2012: 1-27 , paper(Korean)
According to habit formation theory and relative income hypothesis, individual utility (subjective well-being) is determined by their own past consumption levels and others’ incomes respectively, as well as their own current consumption levels. Hence, this paper considers individual past consumptions (incomes), and consumptions (incomes) of two different reference groups one of which is defined by region, and the other by education & occupation in the model to analyze the effects of these variables on subjective well-being. All data was retrieved from KLIPS (Korean Labor and Income Panel Study). For subjective well-being, individual life-satisfaction survey data was used. Regional groups were divided into 16 provinces, and education & occupation groups have been categorized into 12 classes. Since the level of life-satisfaction is ordinal rather than cardinal and the used data is panel data, random effect ordered probit is used to estimate the effects of consumptions (incomes) of reference groups and past consumptions (incomes). The results of this paper show that 1) the durability of consumption is more important than habit formation in terms of consumption since individual past consumptions give a significantly positive effect on individuals’ satisfaction. 2) On the other hand, the coefficients of relative income show both positive and negative signs depending on the reference groups. Individual satisfaction was negatively affected by regional groups’ average consumption levels while, in contrast, individual satisfaction was affected positively by the average consumption levels of education & occupation groups. These results imply the possibility of diverse effects of reference groups on subjective well-being.
Journal of Social Science 38(3), 2012: 1-27 , paper(Korean)
According to habit formation theory and relative income hypothesis, individual utility (subjective well-being) is determined by their own past consumption levels and others’ incomes respectively, as well as their own current consumption levels. Hence, this paper considers individual past consumptions (incomes), and consumptions (incomes) of two different reference groups one of which is defined by region, and the other by education & occupation in the model to analyze the effects of these variables on subjective well-being. All data was retrieved from KLIPS (Korean Labor and Income Panel Study). For subjective well-being, individual life-satisfaction survey data was used. Regional groups were divided into 16 provinces, and education & occupation groups have been categorized into 12 classes. Since the level of life-satisfaction is ordinal rather than cardinal and the used data is panel data, random effect ordered probit is used to estimate the effects of consumptions (incomes) of reference groups and past consumptions (incomes). The results of this paper show that 1) the durability of consumption is more important than habit formation in terms of consumption since individual past consumptions give a significantly positive effect on individuals’ satisfaction. 2) On the other hand, the coefficients of relative income show both positive and negative signs depending on the reference groups. Individual satisfaction was negatively affected by regional groups’ average consumption levels while, in contrast, individual satisfaction was affected positively by the average consumption levels of education & occupation groups. These results imply the possibility of diverse effects of reference groups on subjective well-being.