Empirical Evidence for Government Failure The Cause of Economic Crisis: Hag-Soo Kim Korea Economic Research Institute

Korea Economic Reasearch Institute2 Korea Economic Research Institute(KERI) Private Business Circle Think Thank Ideology: Free Market, Free Enterprise, Free Competition KERI Produce Long-term and Short-term Research outputs under 3 Fs KERI FKI Federation of Korean Industries Marketing KERI’s Research Output to National Assembly and Governments FKI Federation of Korean Industries Marketing KERI’s Research Output to National Assembly and Governments

Korea Economic Reasearch Institute3 Brief Summary of KERI’s Activity after the Economic Crisis 1.Research: Main Job  Growth and Employment Strategy to Overcome the Crisis( )  “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( )  “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 Institute4 Brief Summary of KERI’s Activity after the Economic Crisis 1. Research: Main Job  The Cause of Economic Crisis: Government Failure ( )  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 Research: Main Job  The Cause of Economic Crisis: Government Failure ( )  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 Institute5 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 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 to our Members  Scholarly Activity in Korean Academic Society

Korea Economic Reasearch Institute6 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 Institute7 About The International Conference to be Held on Oct. 27

Austrian Business Cycle Theory Korea Economic Reasearch Institute8 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 Institute9 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 Institute10 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 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 Institute11

Evidence from Industrial Investment Data(cont’d) Korea Economic Reasearch Institute12

Evidence from Industrial Investment Data(cont’d) Korea Economic Reasearch Institute13 (Unit: %)

Evidence from Industrial Investment Data(cont’d) Korea Economic Reasearch Institute14

Evidence from Industrial Investment Data(cont’d) Korea Economic Reasearch Institute15

Evidence from Industrial Investment Data(cont’d) Korea Economic Reasearch Institute16

Evidence from Macro Data; Using a VECM Korea Economic Reasearch Institute17 PFI : private fixed investment PC : private consumption CTS : cumulative term spread Z : short-run error correction term

VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Korea Economic Reasearch Institute18

Cointegrate VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Korea Economic Reasearch Institute19 PFI CTS PC CTS 1% ↑ PC 0.74% ↑ PFI 0.87% ↑

VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Korea Economic Reasearch Institute20 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 Institute22 Interest rate ↓ Spread ↑ Consumption ↑ (until t+10Q) Increasing rate ↓

VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Korea Economic Reasearch Institute23 Response of lnPFI Response of lnPC

Korea Economic Reasearch Institute24