Date of Award

2018

Document Type

Open Access Dissertation

Department

Moore School of Business

Sub-Department

Economics

First Advisor

Janice Breuer Bass

Abstract

Free Trade Agreements and Purchasing Power Parity: Evidence from South Korea

We explore whether a decline in tariffs after the passage of South Korea’s free trade agreements yields evidence more favorable to purchasing power parity between South Korea and its free trade partners. Our data include two aggregated measures of prices – the CPI and the PPI – as well as disaggregated CPI data for six selected, highly tradable items: food, alcoholic beverages, non-alcoholic beverages, clothing, footwear and tobacco products. We study nine free trade partners using data for the sample period January 1998-November 2017. Utilizing a battery of conventional linear unit root tests, we find limited support for PPP between South Korea and its FTA partners after the free trade agreement. Our results suggest that, even after the removal of tariffs, other barriers to trade may exist that impede the free flow of goods and the attainment of purchasing power parity. It is also possible that alternative tests that incorporate non-linearities may explain our results.

Free Trade Agreements and Market Integration: Evidence from South Korea

We consider the effects of free trade agreements on market integration between South Korea and its FTA partners. Free trade agreements should reduce tariffs and trade costs and lead to faster home-to-foreign price convergence. We investigate these ideas with a non-linear self-exciting threshold autoregressive (TAR) model, by introducing a threshold break at the effective FTA date. This strategy allows us to consider: (1) whether trade costs have declined after the free trade agreement; and (2) whether the speed of adjustment in the home-foreign price differential is faster after the FTA. Our study covers nine of fifteen South Korea's free trade agreements. We find evidence that after free trade agreements, trade costs have been reduced for several countries, providing evidence that greater market integration has been achieved on this score. However, evidence on whether the speed of home-to-foreign price convergence increases after free trade agreements is limited.

Does Inflation Targeting matter for Inflation Persistence?

Inflation targeting is a practice that central banks around the world began to adopt as early as 1990. Inflation targeting policy was expected to lead to success on three counts: (1) a decline in the level of inflation, (2) a reduction in the volatility of inflation, and (3) a decline in inflation persistence, as a central bank publicly announced its commitment to a target range for inflation. However, studies are divided over whether the three outcomes have been realized. Studies of inflation targeting to date have generally relied on variations of linear, autoregressive models. However, there are no studies of inflation targeting to our knowledge that examine inflation persistence by using a model that allows for threshold non-linearity at the targeted inflation range. In this paper, we adapt a threshold autoregressive (TAR) model to study inflation persistence using a select sample of inflation targeters. We compare estimates of inflation persistence from a TAR model over the inflation targeting sample to estimates of persistence from a linear autoregressive model for the period prior to the adoption of inflation targeting. We further examine differences in inflation persistence across level of development and for countries that have ever experienced hyperinflation. To address issues raised that events unrelated to inflation targeting policy could explain our findings, we include a select set of eight non-IT targeters in our study and conduct a counterfactual exercise.


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