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KDI Journal of Economic Policy

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KDI Journal of Economic Policy, August 2018
Language English
SUMMARY The Effect of Enhancing Unemployment Benefits in Korea: Wage Replacement Rate vs. Maximum Benefit Duration / Jiwoon Kim

This paper studies the macroeconomic effects of an enhancement in unemployment benefits in Korea. In particular, I quantify the welfare effect of two specific policy chances which have been mainly discussed among policymakers in recent years: increasing wage replacement rates by 10%p and extending maximum benefit durations by one month. To this end, I build and calibrate an overlapping generation model which reflects the heterogeneity of the unemployed and the specificity of the unemployment insurance (UI) system in Korea. The quantitative analysis conducted here shows that extending maximum benefit durations by one month improves social welfare, whereas increasing wage replacement rates by 10%p deteriorates social welfare. Extending maximum benefit durations is applied to potentially all the UI recipients, including unemployed workers whose wage before job loss is relatively low and whose marginal utility is relatively high. However, increasing wage replacement rates is applied to only a small number of UI recipients whose wage before job loss is relatively high, while the increase in the UI premium is passed onto all of the employed. This study suggests that given the current UI system and economic environment in Korea, it is more desirable to extend maximum benefit durations rather than to increase wage replacement rates in terms of social welfare.

Nexus between Inflation, Inflation Perceptions and Expectations / Minho Nam and Minji Go

We uncover a nexus between actual inflation, inflation perceptions and expectations in Korea through analyzing micro as well as aggregate data from the Consumer Survey. We document two novel findings. First, households’ subjective perceptions of inflation exert more impact on expectation formation than actual inflation. Second, inflation perceptions are broadly in line with the trajectory of the inflation trend. This is attributable to the fact that changes in actual inflation have been generated mainly by the consumption items whose price changes are perceived more sensitively as those items are frequently bought or have a larger share in household expenditures. Conducting a crosscountry comparison, we find that information rigidity in expectation formation process and the nexus between perceptions and expectations of inflation prove to be stronger in Korea. Additionally, we reconfirm the existing finding that the scope of information utilized for forming inflation expectations is fairly circumscribed.

The Effects of Non-Recourse Mortgages on Default Risks and Households’ Surplus / Keeyoung Rhee

We study whether a default option attached to non-recourse mortgages improves borrowers’ surplus from mortgage financing. By defaulting on mortgage debt, borrowers can save their non-collateralized income from being foreclosed. In exchange, borrowers must forgo nonmonetary surplus from retaining any collateral. Banks may charge a high mortgage rate due to increased default rates. We find that the interest rate of non-recourse mortgage decreases with the borrower’s surplus from home ownership. Moreover, non-recourse mortgages benefit only borrowers who deem housing property as an investment asset. Hence, the transition to a non-recourse mortgage is detrimental to welfare if the borrower enjoys a large surplus from home ownership. Although the borrower privately knows how much surplus she enjoys from home ownership, a menu of non-recourse mortgage contracts may exist, yielding a separating equilibrium without information rent.

Relative Effectiveness of Various Development Finance Flows: A Comparative Study / Kye Woo Lee and Minji Hong

This paper aims to identify the most effective mode of development finance flows for the economic growth of middle-income developing and least developed countries, separately. It also attempts to confirm whether governance has any significant role in the causal relationship between development finance flows and economic growth. Policymakers in each developing country should select the most effective modality of development finance inflows among the different modalities (such as Official Development Assistance (ODA) grants, Official Development Assistance (ODA) loans, FDI, and international personal remittances) and expand it for their economic growth. Dynamic panel regression models were used on 48 least developed countries and 89 middle-income developing countries, respectively, during the Millennium Development Era: 2000-2015. The empirical analysis results show that ODA grants and remittances were most effective in promoting economic growth for least developed countries, while FDI was most effective for middle-income developing countries. These findings were not affected by the status of governance of the individual country.
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