Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital

We develop an open economy macroeconomic model with real capital accumulation and microeconomic foundations. We show that expansionary monetary policy causes exchange rate overshooting, not once, but potentially twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities.

Monetary Policy in a Portfolio Balance Model with Endogenous Physical Capital

We develop a portfolio balance model with real capital accumulation. The introduction of real capital as an asset as well as a good produced and demanded by firms enriches extant portfolio balance models of exchange rate determination. We show that expansionary monetary policy causes exchange rate overshooting, not once, but twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firms' decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through portfolio diversification in corporate securities.

The Performance of Domestic and Foreign Banks: The Case of Korea and the Asian Financial Crisis

This paper considers the performance of banks, domestic and foreign, in Korea prior to, during, and immediately after the Asian financial crisis, examining how the profitability of those banks differed and identifying factors that explain why those differences existed. The performance of Korean banks deteriorated dramatically in 1998 with most banks recovering somewhat in 1999. Foreign banks did not experience the same negative effect on their returns on assets and equity as a rule. Several standard findings emerge. For example, equity to assets correlates positively with domestic, but not foreign, bank performance, as measured by the returns on assets and equity, even when the government recapitalized institutions that were performing quite badly. Also, foreign-currency deposits significantly and negatively correlate with domestic Korean bank performance, although only in the post-crisis period for regional banks. In sum, the domestic Korean banks suffered more severely from the Asian financial crisis than foreign banks.

The Effects of Credit Risk on Dynamic Portfolio Management: A New Computational Approach

The study investigates the role of credit risk in a continuous time stochastic asset allocation model, since the traditional dynamic framework does not provide credit risk flexibility. The general model of the study extends the traditional dynamic efficiency framework by explicitly deriving the optimal value function for the infinite horizon stochastic control problem via a weighted volatility measure of market and credit risk. The model's optimal strategy was then compared to that obtained from a benchmark Markowitz-type dynamic optimization framework to determine which specification adequately reflects the optimal terminal investment returns and strategy under credit and market risks. The paper shows that an investor's optimal terminal return is lower than typically indicated under the traditional mean-variance framework during periods of elevated credit risk. Hence I conclude that, while the traditional dynamic mean-variance approach may indicate the ideal, in the presence of credit-risk it does not accurately reflect the observed optimal returns, terminal wealth and portfolio selection strategies.