Browsing by Author "Lee, Sang Seok"
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Item Open Access The Asian financial crisis and international reserve accumulation: a robust control approach(Elsevier, 2018) Lee, Sang Seok; Luk, P.Standard macroeconomic models have difficulties accounting for the surge in international reserves of Asian countries in the aftermath of the Asian Financial Crisis of 1997. We propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon. Using Korean data, we estimate a simple permanent income model augmented with model uncertainty, find a structural break at the point of the Asian Financial Crisis, and identify a rise in concern for model misspecification which is distinct from an increase in income volatility. The post-crisis concern for model misspecification implies a reasonable detection error probability. We also show that learning serves as an additional powerful amplification mechanism in our framework.Item Open Access The economic impact of recession announcements(Elsevier, 2021-03-19) Eggers, A. C.; Ellison, M.; Lee, Sang SeokThe convention in the news media is to announce a recession if a country experiences two consecutive quarters of negative growth. We exploit the arbitrary threshold implied by this practice to identify the economic impact of recession announcements through a Regression Discontinuity Design (RDD). Estimation results show that news of a recession leads to a discontinuous fall in consumer confidence, consumption growth and final estimates of GDP growth in a panel of countries. The effect is large, robust and statistically significant.Item Open Access Exchange rate and inflation under weak monetary policy: Turkey verifies theory(Oxford University Press, 2023-8-7) Gürkaynak, Soykan Refet; Kısacıkoğlu, Burçin; Lee, Sang SeokFor the academic audience, this paper presents the outcome of a well-identified, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. In doing so, it also clarifies how neo-Fisherian disinflation may work or fail, in theory and in practice. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfied and eventually a negative coefficient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the “standard model” suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no and yes.Item Open Access Information value of the interest rate and the zero lower bound(Cambridge University Press, 2020) Lee, Sang SeokWhy is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.Item Open Access Monetary policy surprises and exchange rate behavior(Elsevier BV, 2021-05) Gürkaynak, Refet S.; Kara, Hakan; Kısacıkoğlu, Burçin; Lee, Sang SeokCentral banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.Item Open Access Stock market's assessment of monetary policy transmission: The cash flow effect(John Wiley & Sons, Ltd, 2022-05-30) Gürkaynak, Refet; Karasoy-Can, Hatice Gökçe; Lee, Sang SeokWe show that firm liability structure and associated cash flows matter for firm behavior and that financial market participants price stocks accordingly. Stock price reactions to monetary policy announcements depend on the type and maturity of debt issued by the firms and the forward guidance provided by the Fed, both at and away from the zero lower bound. Further, the marginal stock market participant knows the current liability structures of firms and does not rely on rules of thumb. The cash flow exposure at the time of monetary policy actions predicts future investment, assets, and net worth, clearly violating the Modigliani-Miller theorem.