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Empirical Evidence for Government Failure
The Cause of Economic Crisis:The Cause of Economic Crisis:
Hag-Soo Kim
Korea Economic Research Institute
Korea Economic Reasearch Institute 2
Korea Economic Research Institute(KERI)
Private Business Circle Think ThankIdeology: Free Market, Free Enterprise, Free Competition
KERIKERI
Produce Long-Produce Long-
term and Short-term and Short-
term Research term Research
outputs under 3 outputs under 3
FsFs
FKIFederation of
Korean Industries
Marketing KERI’s Research Output
to National Assembly and Governments
Korea Economic Reasearch Institute 3
Brief Summary of KERI’s Activity after the Economic Crisis
1. Research: Main Job
Growth and Employment Strategy to Overcome the Crisis(2009. 1)
“Crisis is Opportunity”: Enhancing Competitiveness of Business via R&D, FTA, Regulatory Reform, Low Corporate Tax Rate, M&A
Job Creation Campaign by increasing Flexibility of Labor Seminar Open to Public and Bureaucrats
1. Research: Main Job
Growth and Employment Strategy to Overcome the Crisis(2009. 1)
“Crisis is Opportunity”: Enhancing Competitiveness of Business via R&D, FTA, Regulatory Reform, Low Corporate Tax Rate, M&A
Job Creation Campaign by increasing Flexibility of Labor Seminar Open to Public and Bureaucrats
Korea Economic Reasearch Institute 4
Brief Summary of KERI’s Activity after the Economic Crisis
1. Research: Main Job
The Cause of Economic Crisis: Government Failure (2009. 10 )
Losing Free Market: More Regulations and Lager Governments
Need to Find some Evidence for Government Failure causing the Economic Crisis: “Not Market Failure But Hampered Market Failure by Government Intervention”
Preparing for an International Conference on Oct. 27.
1. Research: Main Job
The Cause of Economic Crisis: Government Failure (2009. 10 )
Losing Free Market: More Regulations and Lager Governments
Need to Find some Evidence for Government Failure causing the Economic Crisis: “Not Market Failure But Hampered Market Failure by Government Intervention”
Preparing for an International Conference on Oct. 27.
Korea Economic Reasearch Institute 5
Brief Summary of KERI’s Activity after the Economic Crisis
2. Opinion Leading: Based on Our Main Research Results
Posting Columns in Daily Newspapers
Circulation KERI Webzine via E-mail to our Members
Scholarly Activity in Korean Academic Society
2. Opinion Leading: Based on Our Main Research Results
Posting Columns in Daily Newspapers
Circulation KERI Webzine via E-mail to our Members
Scholarly Activity in Korean Academic Society
Korea Economic Reasearch Institute 6
Brief Summary of KERI’s Activity after the Economic Crisis
3. Education
To Correct the Prevailing Sentiment against Business and the Rich
Educate Various Opinion Groups: Police Officers, Lawyer, PDs from Mass-Media, School Teachers, Young Leaders (Selected University Students)
Free Market Economy may not be the Perfect but the Best.
3. Education
To Correct the Prevailing Sentiment against Business and the Rich
Educate Various Opinion Groups: Police Officers, Lawyer, PDs from Mass-Media, School Teachers, Young Leaders (Selected University Students)
Free Market Economy may not be the Perfect but the Best.
Korea Economic Reasearch Institute 7
About The International Conference to be Held on Oct. 27
Austrian Business Cycle Theory
Korea Economic Reasearch Institute 8
Government Interest ↓ or Money supply ↑
Over ConsumptionMal - Investment
Bust More Volatility in Investment than Consumption
Unsustainable
Artificial Boom
DATA For Industrial Level Analysis
Korea Economic Reasearch Institute 9
US 63 industrial investment(stock price)
period(1991 ~ 2007)
2 types of assets (equipments, structures)
Check the bust process
after the year 2007
using stock price index
Evidence from Industrial Investment Data
Korea Economic Reasearch Institute 10
Three Basic Patterns of Investment Trends
Over Investment in Higher Order Production Industries during Artificial Boom and Sharp Decrease during the Following Bust
Over Investment in some industries producing Consumption Goods during Boom and Drastic Decrease in the Following Bust
Over Investment in some industries taking advantage of Lowered Interest rates, which might be the cause of the Following Business Cycle
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 11
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 12
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 13
(Unit: %)
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 14
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 15
Evidence from Industrial Investment Data(cont’d)
Korea Economic Reasearch Institute 16
Evidence from Macro Data; Using a VECM
Korea Economic Reasearch Institute 17
p
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p
j jt
p
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n
k
htht
p
j tjt
p
j jt
p
j jtj
n
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htht
p
j tjt
p
j jt
p
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n
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CTSPCPFIZCTS
CTSPCPFIZPC
CTSPCPFIZPFI
1 331 31 31 13
1 221 21 21 12
1 111 11 11 11
lnlnlnln
lnlnlnln
lnlnlnln
PFI : private fixed investment PC : private consumptionCTS : cumulative term spread Z : short-run error correction term
VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2)
Korea Economic Reasearch Institute 18
11tZ
21tZ
2Radj
StatF
Cointegrate
Cointegrate
VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2)
Korea Economic Reasearch Institute 19
PFI
CTS
PC
CTS 1% ↑
PC 0.74% ↑
PFI 0.87% ↑
VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2)
Korea Economic Reasearch Institute 20
011tZ
1211 lnln tt CTSCPCCC
1ln tPFI
Short – run Disequilibrium at t-1
Reduce Investment at t
Response Function of lnPFI to lnCTS
Korea Economic Reasearch Institute
Interest rate ↓
Spread ↑
Investment ↑(until t+8Q)
Increasing rate ↓
Response function of lnPC to lnCTS
Korea Economic Reasearch Institute 22
Interest rate ↓
Spread ↑
Consumption ↑
(until t+10Q)
Increasing rate ↓
VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2)
Korea Economic Reasearch Institute 23
Response of lnPFI Response of lnPC
Korea Economic Reasearch Institute 24
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