Wage, Price Level, and Property Price in Hong Kong: A Simple Analytical Model with Forecast. Fuchun Jin 1

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1 Wae, ce evel, ad opey ce o Ko: Smple alycal Model h Foecas Fuchu J e Uvesy ad o Ko Isue fo Moeay eseach elmay veso, fo KIM sema o Febuay, 3 bsac hs pape aalyzes he deemao of ae, pce level, ad popey pce o Ko, especally pay aeo o he edepedece amo hem. elaoshps amo e, ae, ad pces of adable ad oadable oods ae esablshed accod o a smple opmzao-based eeal equlbum model. Compaave sac esuls of he model ae obaed fo aalyss of he mpac of polcy chaes. he fudameal value of popey pce, assumed as he pese value of expeced fuue es, s calculaed fo a specal case of cosa fuue e oh. he esuls clude boh he case he eal coacs ae fully flexble ad he hee s dy eal coacs. Sascal aalyss dcaes ha he model fs he expeece of o Ko ell fo he peod 984Q-993Q4. Based o he model, he pape pedcs ha he cue popey pce o Ko s sll abou 4% above he fudameal level, ad may have doad adusme he fuue. Emal addess: f@cce.pu.edu.c. hs pape as e hle he auho as a eseach fello a he o Ko Isue fo Moeay eseach KIM. e shes o ha Dcso am of he sue fo eseach asssace. Commes ad dscussos fom Wllam Baso, as Gebe, Sefe Gelach, aul De Gaue, ad Mahe Yu, as ell as ohe pacpas a he KIM sema ad coffee al ae aefully acoleded. he ves expessed hee ae he auho s oy, ad do o ecessaly eflec hose of he KIM, s coucl of advses, o s boad of decos.

2 . Ioduco Whle o Ko s sll dely cosdeed as oe of he fees ad mos compeve 3 ecoomes he old oday, has bee peplexed by a myad of poblems afe he hadove ad he subseque sa facal css. h aes of uemployme 4, cosecuve ecessos, poloed peods of deflao 5 ad upecedeed fscal defcs 6, hese ae phases ha oe eads cosay he es meda, hch po o he poo oveall pefomace of he o Ko ecoomy a he pese mome. ccal l all of he poblems ha o Ko faces oday s he collapse of he popey pce, hch had expeeced a specacula se fom he md 98 s u he las quae of 997, he he olle coase saed he damac dou. Sce he has falle couously, by abou 65 pece. he popey mae has a paculaly sfca ole he o Ko ecoomy. ous s he mos mpoa asse of mos households. he soc mae s domaed, ems of oal capalzao, by a hadful of eal esae hold compaes ad bas, heeas moaes mae up a lae faco of o Ko bas asses. I he labo mae, popey ad s elaed secos employ a lae umbe of people ad cobue mpoay o he GD of o Ko. ecpous fall of he popey pce esuled sfca coaco of households ealh o Ko. Ideed, a lae umbe of homeoes o Ko ae budeed h eave eques as esul of he bus of he popey bubble 7. educed ealh ll evably cual pvae cosumpo sped, ad esul ea demad he ecoomy. I he facal seco, he collapse of he popey pce leads o a educo of he value of collaeals fo households ad busesses. he coseque eae of he pvae seco s capal poso ll lely cosa bas ably exed ced o he cles balace shee effec. hs decease of he exe of facal emedao may cobue fuhe o he coaco of eal ecoomc acves. he eae Foudao ad he Wall See Joual, he 3 Idex of Ecoomc Feedom compled ovembe, aed o Ko as o. he old. 3 ccod o he Wold Compeveess Yeaboo, publshed by he Ieaoal Isue of Maaeme Developme IMD Szelad, o Ko s oveall compeveess aed 9 h 6 h. 4 Uemployme ae eached 7.8% July. lhouh deceased o 7.% ovembe, e slhly up aa Decembe o 7.%. 5 he CI of o Ko has falle couously, sce 998, by abou 3%. 6 Bude defc fo he fscal yea eded o Mach 3 oaled 63.3 bllo o Ko dollas, be 5.% of he GD. Defc fo he peod fom Mach 3 o Decembe s expeced o be moe ha 77 bllo o Ko dollas. 7 ccod o a suvey coduced by he o Ko Moeay uhoy, a he ed of Mach, 67,5 o 4% of moae booes had eave eques. hey volve % of he oal value of esdeal moae loas.

3 O op of ha, he fscal poso of he oveme s que vuleable o a sfca fall of he popey pce. Due o hsocal easos, lad pemum ad popey elaed axes have bee a mos mpoa souce of come fo he o Ko oveme. s such, popey pce decle has bee oe of he pcpal facos esposble fo he elavely lae bude defc of he o Ko oveme he las couple of yeas. Defcs mply acpaed fuue cease of axes o decease of oveme sped; boh may lead o fuhe coaco of he ecoomy eeal. I s hus exemely mpoa o develop a bee udesad of he popey pce, s chae ove me, ad paculaly s elaoshp h ohe mpoa vaables he o Ko ecoomy. ha level, fo example, should a fudameal o fa, easoable popey pce be o Ko? Wha ae he pcpal facos ha may affec hs fudameal level of popey pce? houh ha chaels do hose facos affec he fudameal pce? o s he cue popey pce o Ko compaed o s fudameal level? hese quesos ae evdey of ea ees o oy publc polcy debaes, bu also o oday households ad busesses as ell. o fd ases o hose quesos s, eveheless, o easy. Due o he ese speculave acves ad bubbles volved he popey mae o Ko, us as ohe asse maes, s hhly upedcable as sho by ece expeeces. Fo hs easo pehaps, up o o vually all sudes, albe fe umbe, ae based o ad hoc o-sucual appoaches, ad hey ae defely fom a paal equlbum pespecve. Ideed, mos papes dscuss he popey mae o Ko ae, moe o less, of he oualsc aue. I hs pape, e exame chaes of he popey pce o Ko ece yeas by aalyz s elaoshp h ohe ecoomc vaables of o Ko, paculaly emphasz he edepedece amo ae, pce level, ad popey pce. he aalycal appoach of he pape s based o a smple model h a moe accuae ad complee descpo of he elaoshps amo e, ae, ad pces of he adable ad oadable oods. I s based o mcoecoomc heoy ha aes o accou he opmz behavo of households ad busess fms. he model s also of eeal equlbum aue. Compaave sac esuls of he model ae obaed fo aalyss of he mpac of polcy chaes. he fudameal value of he popey pce, assumed as he pese value of expeced fuue es, s calculaed fo a specal case of cosa fuue e oh. he esuls clude boh he case he eal coacs ae fully flexble ad he hee s dy eal coacs. Sascal aalyss dcaes ha he model fs he expeece of o Ko easoably ell fo he peod 984Q- 993Q4. Based o he model, he pape pedcs ha cue popey pce o Ko s sll abou 4% above he fudameal level ad may have doad adusme he fuue. he es of he pape s oazed as follos: Seco povdes a descpve ad schemac aalyss of he edepedece amo ae, pce level, ad e ad popey pce. he smple opmzao-based bechma model s developed Seco 3. Some compaave sac aalyss of he coclusos obaed fom he model s offeed 3

4 Seco 4. Seco 5 dscusses he fudameal value of he popey pce based o pese value of fuue expeced es, hee eal coacs ae fully flexble ad deped o he vaables cluded he model. Seco 6 aalyzes popey pce he hee s dy eal coacs. Seco 7 povdes sascal aalyss of he daa fo o Ko ad some foecass. Coclud emas ad possble mpovemes fuhe eseach o he opc of he o Ko popey pce ae cluded he fal seco.. Iedepedece amo Wae, ce, e ad opey ce Wae, pce level, ad popey pce o Ko have oe houh some of he mos sfca chaes he ece hsoy Fue -3. lhouh he exe of he chae dffes amo hem, hee s clealy a commo doad eeal ed he moveme of all hee vaables. Obvously, movemes of ae, pce level, ad popey pce ae o depede. hey ae eelaed ad ca affec each ohe o a ea deee. Meahle, hey ca be sfcay affeced by umeous ohe facos as ell. Cea facos may cocevably have cobued o, fo example, he pce decle o Ko. hey clude, bu ae o lmed o, a ea aeae demad because of educed pvae cosumpo expedue ad pvae domesc vesme, exeal deflaoay pessue fom Maad Cha, he Ued Saes ad Japa, as ell as ohe demad ad supply facos. Ideed, ude he cue moeay aaeme of a led exchae ae 7.8 K$s o he US$ esablshed Ocobe 983, he pmay chael houh hch he o Ko ecoomy ca accommodae ad adus o vaous shocs s chae of pces. ese, umeous facos ca affec he ae ae, he popey pce, ad he popey eal pce o Ko. Ieal elaoshps ad edepedece amo hese vaables, as ell as some of he exeal facos ha may fluece hem, ae schemacally llusaed Cha. I fac, besdes coempoaeous eacos amo hem, hee ll udoubedly be dyamc adusmes alo he me dmeso as ell. he pocess of dyamc evoluo fo ae, pce ad popey pce ca be demosaed by Cha. Fo he easo of smplcy, hs pape I model he coempoaeous chaes fs, ad do o explcly model he dyamc adusme pocess ohe ha pefom some compaave sac aalyss. hee s clealy also a vey close elaoshp beee he popey pce ad e, hch s abued o he fac ha hous s boh a cosumpo ood ad a asse. Fo a ee of a hous popey, he eal pce dcaes s cos as a cosumpo ood. s such, s elaed o ad mus be cosaed by he pces of ohe cosumpo oods. Ideed, he pces of ohe cosumpo oods ae lo elave o he eal pce of hous, cosumes ca subsue he cosumpo of hous by ohe oods o a cea exe. hs holds ue fo a o of a hous popey oo, eadless of hehe he oe lves o he popey o o. I he case he he popey s oe occuped, he e s meely he mplc o oppouy cos. 4

5 s fo he popey pce self, eflecs s value as a asse. he eu o hous popey, us as ay asse, s he pese value of he fuue seam of es, plus he capal a o loss he he popey s sold. he eu o hous heefoe s elaed o ad should be cosaed by he eu o ohe asses, he s ad lqudy dffeeces ae appopaely ae o cosdeao. I ode o esablsh he elaoshp beee he fudameal popey pce ad ohe ecoomc vaables o Ko, hs pape, e fomalze he above-descbed o elaoshps. hey ae he elaoshp beee popey eal pce ad ohe commody pces as ell as ae ae; he elaoshp beee e ad popey pce. 5

6 abo demad abo supply abo poducvy Exeal aes Cha Wae ce evel opey pce adable oadable e Demad Foe pces Cha, US, ec oducvy Ohe supply facos... ad supply Iees ae Icome oh Demoaphcs Capal flo ouflo Speculave acves qudy of he mae, depecao, maeace cos... Cha Wae Wae Wae ce evel opey ce ce evel opey ce ce evel opey ce eod - eod eod Cha 6

7 3. Smple Opmzao-Based Geeal Equlbum Model Ou aalyss sas by esablsh a bechma model of he edepedece amo e, ae, ad he pce of adable ad oadable oods. he model assumes ha all maes couously clea espose o cha codos of supply ad demad, ad hee s o pce dy o mae falue he ecoomy. he ecoomy s assumed o poduce o compose commodes, adable oods ad oadable oods. hee ae o ypes of households. he fs ype s a oe, hle he secod ype a ee, of hous popees. Fo smplcy, assume hee s oy oe poduce 8, hch poduces boh commodes us labo as he oy vaable pu he sho u. he oaos used he model of hs pape ae as follos: : adable oods; : ce of adable oods; * : ce of adable oods aboad, measued he foe cuecy; : oadable oods; : ce of oadable oods; E : omal exchae ae umbe of domesc cuecy us pe foe cuecy u. : oal umbe of ype households; : oal umbe of ype households; : oal umbe of households of boh ypes, ; λ : he peceae of ype households, λ ; h : veae amou of hous popees oed by ype household; : he oal amou of hous soc 9 he ecoomy, h ; : eal pce of hous popees; : ce of hous popees; : Wae ae; l : me edome of each household; : ype household s demad fo hous; : ype household s demad fo hous; 8 Moe ealscally, hee should be may poduces ha poduce a compeve evome u pof s zeo fo all. ssum cosa eus o scale poduco, he popooal uses of labo he poduco of he o compose commodes ae he same eadless of hehe hee s oe poduce o may poduces. 9 he oal amou of supply of hous popees aduss elavely sloly espose o pce chaes. We hus assume hs pape ha amou o be exoeously deemed. I fac, he quay should be edoeously ad oy deemed by popey developes ad he o Ko oveme. ossble fuhe sudes of vesme behavo of popey developes ad he oveme ae descbed a he of hs pape. 7

8 : ype household s supply of labo; : ype household s supply of labo; : abo demad of he poduce fo poduco of adable oods; : abo demad of he poduce fo poduco of oadable oods;,, ype ousehold:,, : aamees of households uly fuco;,, : aamees of poduce s poduco fuco. Fo ype household, a oe of hous popey, h a cosa elascy of subsuo uly fuco, he elfae maxmzao poblem s Max S.. U,,, l l, h Soluos ae l h l h l h l h Sce hs household os h amou of hous popees, ll supply he excess amou o he eal mae ype ousehold: h h Fo ype household, a ee of hous popey, h he same cosa elascy of subsuo uly fuco, he elfae maxmzao poblem s Max Soluos ae U,,, l l, S.. l 8

9 l l l l ous Mae Equlbum: he eal hous mae s equlbum he he oal supply by oes s equal o he oal demad by ees S Sce λ s he faco of households ha o hous popees D Fom ha, e e oduce: λ h λ λh l Fo he poduce h Cobb-Doulas poduco fucos, assum ha physcal capal ad commecal popees used poduco ae fxed he sho u, ad ae cluded as a fxed cos em C, he pof maxmzao poblem s Max S.. π C Opmzao eals π π Soluos o he above poblem,.e., labo demad he poduco of adable ad oadable oods ae, especvely 9

10 I ems of supply of he o oods, hey ae oal supply of labo s he sum of labo supply by o households [ ] l h l λ λ λ λ oal demad fo labo abo Mae Equlbum: he labo mae s equlbum he he oal supply of labo by boh ypes of households s equal o he oal demad fo labo by he poduce, he poduco of boh he adable ad oadable oods D S amely h l λ Equlbum he oadable Goods Mae:

11 he oadable oods mae s equlbum he s oal supply by he poduce s equal o he oal demad by boh ypes of households D S amely l h l λ λ We e I a small ope ecoomy such as ha of o Ko, assum puchas poe pay holds fo adable oods,.e. * E Wae, eal pce of popees, ad he pce of oadable oods ae, especvely E φ * h E φ * * E φ ll paamees hose expessos ae posve ad hey ae as follos φ

12 φ φ 4. Compaave Sac alyss Wae, e ad he ce of oadable Goods: E > *, >, > * * E E cease of he foe adable oods pce, o a devaluao of he domesc cuecy, leads o hhe ae ae, hhe e ad hhe oadable oods pce. >, >, > Balassa-Samulso effec, < cease of he poducvy he adable seco leads o hhe ae ae, hhe e ad hhe oadable oods pce. cease of he poducvy he oadable seco leads o loe oadable oods pce. <, >. Whle < o > f < o > cease of he oal umbe of households ll bd do ae ad bd up e. s a esul, household s come deceases, hch leads o a loe demad ad hus loe pce fo oadable oods. O he ohe had, a cease of he oal umbe of households ll esul eae demad fo oadable oods ad hus leads o hhe. he oveall effec o s ambuous ad depeds o he s of. Cosume ce Idex: he CI s a ehed aveae of he pce of adable ad oadable oods, ad he eal pce of hous, Whee,, ae he popooal ehs he pce dex, hch ae assumed o be fxed cosas. hey ae pese accod o he especve mpoace he

13 cosumpo budle of a ypcal cosume ad ae o adused bu afe a exeded lapse of me. φ φ * E h E > * cease of he foe adable oods pce, o a devaluao of he domesc cuecy, leads o hhe ae ae, hhe e ad hhe oadable oods pce, ad hus hhe CI. > < cease of he poducvy he adable seco esuls hhe oadable oods pce ad hhe e Balassa-Samulso effec, hch ll lead o hhe CI. ema: If he pof ma he adable seco deceases, say, due o he decle of o Ko s ole as he Mddle Ma, meas a decease of. hs ll esul deceases of ae, e, he pce of oadable oods, as ell as he eeal pce level. cease of he poducvy he oadable seco leads o loe oadable oods pce, ad hus loe CI. < h > cease of he oal supply of hous soc leads o loe e, ad hus loe CI. o < f > o < cease of he oal umbe of households leads o hhe e bu may lead o hhe o loe oadable oods pce, hus he effec o he CI s ambuous ad depeds o he s of. eal Wae ae: φ φ φ h / / >, > 3

14 Icease of poducvy boh he adable ad oadable seco leads o hhe eal ae ae. / > h / < / E * cease of hous supply esuls loe e, hch leads o decease of he CI ad hus cease of he eal ae ae. cease of he oal umbe of households leads o decease of he eal ae ae. hee s o effec of a cease of he foe adable oods pce, o a devaluao of he domesc cuecy, o he eal ae ae. 5. e ad he Fudameal Value of opey ce Up o hs po, e have developed a model of he elaoshp amo e, ae ad he pce of adable ad oadable oods, ec. I ode o udesad moe decly he elaoshp beee he popey pce self ad hose ohe vaables, e have o exame he asse aue of hous popees by vesa he deemao of popey pce vs-à-vs e. Suppose es ae pad a he ed of he peod, ad s he popey s cosa ae of physcal depecao, o he epa ad maeace cos as a cosa faco of he oal value of he popey, he hold peod eu fo hous popey s [ E ] ssum a veso has capal ha ca be vesed ehe o Ko popees o US easuy secues. he hold peod eu fo o Ko popees should heefoe be equal o he ees yeld o he US easuy secuy,, ad moe ealscally, plus a s pemum ad a lqudy pemum. Boh ad may chae ove me espose o cha mae codos. he lqudy pemum, moeove, ouh o be a fuco of he uove ae ζ he popey mae, ad ohe vaables elaed o asaco cos volved popey mae uove. hus ζ, < ζ 4

15 5 E ] [ O E cual pce of hous s equal o he fudameal pce of hous,, plus a bubble em, B B E aoal bubbles ca be chaacezed by all soluos o B B E If e assume ha ees ae, s pemum, ad lqudy pemum ae all cosa ove me, he he fudameal pce of popees should be he pese dscoued value of all expeced fuue es E E Sce h h E * φ φ φ he oh ae of e s h h h

16 6 Whee h a vaable he subscp deoes he oh ae of ha vaable. If he e oh ae s cosa, he E amely h ζ Compaave Sac alyss of opey ce: he fudameal popey pce s affeced by he omal ees ae, he s ad lqudy pemum, he oh ae of he omal ae, he oh ae of he oal umbe of households ad he oh ae of he oal amou of hous. < Icease of he omal ees ae leads o loe popey pces. < Icease of he s he popey mae leads o loe popey pces. > ζ ζ Icease of he uove ae he popey mae educes he lqudy pemum, ad hus leads o hhe popey pces. > Icease of he ae oh ae leads o hhe popey pces. > Icease of he oh ae of he oal umbe of households leads o hhe popey pces. < h Icease of he oh of he oal amou of hous popees leads o loe popey pces.

17 7 Sce omal ae s o exoeous, s oh s a combed esul of oh poducvy, cease of he pce level, oh of he oal amou of hous soc, ad oh of he umbe of households,.e. E φ * h φ φ φ E * l h We have aleave epeseaos of he fudameal popey pce as h ζ d h E * ζ he fudameal popey pce s hece also affeced by poducvy boh he adable ad oadable seco, he domesc ad foe flao ae, he pace of he devaluao o evaluao of he domesc cuecy, ad he eal ees ae. >, > Icease of poducvy boh he adable ad oadable seco leads o hhe popey pces. * >, > E, > Icease of he foe flao ae o adable oods, acceleaed pace of devaluao of he domesc cuecy, ad cease of he domesc flao ae lead o hhe popey pces. < he eal ees ae leads o loe popey pces. 6. opey ce h dy eal Coacs I s que possble ha hee may be dy he popey eal mae, ad he eal pce does o adus saaeously o cha mae codos. Moe coceely,

18 8 hee may be a laed espose of e o he chaes of supply ad demad. Fo example, hs ll be he case f all eal coacs las fo o yeas, ad hus oy half of he coacs come up fo eeal each yea. Suppose, moe fomally, eal coacs ae saeed ad a faco of all eal coacs ae eeed each peod. I hs case, he acual eal pce should be a ehed-aveae of s value he pevous peod, ad he cue equlbum value ha s deemed by he supply ad demad hus he fudameal pce of popees s heefoe See deals of he devao he ppedx E E e o popey pce ao s oce ha f all eal coacs las fo oe peod,.e.,, he

19 We e he case ha e have aalyzed exesvely he pevous seco. 7. elmay Sascal alyses ad Foecas ccod o he coclusos ha ae obaed Seco 5, he ao of e o fudameal popey pce,, should be equal o he sum of he omal ees ae, he s ad lqudy pemum, he depecao maeace cos ao, ad he oh ae of he oal amou of hous, bu subaced by he oh ae of he omal ae ad he oh ae of he oal umbe of households. amely, h cual e o popey pce ao o Ko fom 98 o s ploed Fue 4. Is moveme has folloed a doad ed fom 984 u 997, he saed o move up seadly. hs cease s due o he subsaal decle of he popey pce fom lhouh e decled oo, dd o a less exe vs-à-vs he popey pce pe se. he U.S. fedeal fuds ae ad he 3-moh IBO ae ae sho Fue 5, hle he oh ae of he omal ae, he oh ae of he oal umbe of households less he umbe of publc hous us, ad he oh ae of he oal amou of hous pvae hous us plus subsdzed sales flas ae ploed, especvely, Fue 6-8. o fx deas, le us mae a smplfy assumpo ha he depecao ae, he s ad he lqudy pemum all ema cosa ove me, ad suppose fuhe ha. he maude of, he level a hch he e h pce ao should be, s ploed Fue. lhouh he omal ees ae, epeseed by he U.S. fedeal fuds ae, has bee ahe lo ece yeas, he maude of has sho a upad ed sce 994, heeas h he acual e o pce ao coued o a doad ed fom 994 o 997. Fom he fue, hee s clealy a hh coelao beee ad h fom he 98 s o 994. he o cuves saed o dvee dely fom 994 o, alhouh he ap has aoed sfcay sce. scae plo of hese o quaes Fue 4 cofms he esuls. Smla coclusos ae also obaed he case he hee s dy eal coac, as sho Fue 5. 9

20 Fue eveals ha he acual e o pce ao has bee lo elave o he fudameal value epeseed by, paculaly sce 997, h hch sals ha he ao should move up. If e has bee mov do, as as he case sce lae 997, mples ha popey pce ll move do fase ha he e dd, ad a a ae ha s deemed by he chae of. Bu ho h much should he popey pce move? he ase s offeed by some smple sascal aalyss. ssum, he follo equao s esmaed fo he sample peod 984Q-993Q4 39 obsevaos by OS. he esuls ae lsed able. C C ε h Coeffce Sd. Eo -Sasc ob. C C squaed dused -squaed able Cosde des eal coacs, he follo equao s esmaed fo he same sample peod by OS, hle assum, ad / 8 faco of me of a quae a -yea coac. he esuls ae lsed able. C h C h ε he aveae acual eal oh aes ece yeas ae: 997Q4-Q3 -.5 %; 999Q-Q3 -.3 %; 999Q-Q %. he aveae value of fom 999Q o Q4 s equal o.5%. h

21 Coeffce Sd. Eo -Sasc ob. C C squaed dused -squaed.6857 able bou hee-quaes of he vaaos ca be explaed by. h Whou hav ed ohe aleaves o / 8, appeas ha hee ae o as by clud dy of eal coacs he cosdeao. he follo equao s subsequey esmaed fo he same sample peod by OS. he esuls ae lsed able 3. D D D D 3 D 4 h ε Coeffce Sd. Eo -Sasc ob. D D D D D squaed dused -squaed.8996 bou 9% of he vaaos addo, appeas ha sce ad h able 3 ca be abued o he explaaoy vaables. I ae boh sfca, hch s udesadable, φ h φ φ Chaes of he omal ae ae have hus aleady cluded fomao abou he chaes of he umbe of households ad he chaes of he oal amou of hous supply. amely, hese hee vaables ae o depede oes. I ohe ods, ems

22 of he effecs o he e o popey pce ao, he omal ae s a suffce sasc ha capues all eleva fudameal aspecs of he ecoomy. fe dopp he o sfca vaables, he follo equao s esmaed fo he same sample peod by OS. he esuls ae lsed able 4. D D D ε Coeffce Sd. Eo -Sasc ob. D D D squaed dused -squaed able 4 We use he coeffces obaed able 4, able 3 ad able o plo ad foecas he e o popey pce ao, he popey pce dex, ad he devao of acual popey pce fom ha s pedced by he model. he esuls ae sho Fue 7 o Fue 5. he fues dcae ha he pasmoous model fs he expeece of o Ko ell fo he peod 984Q-993Q4 fo he e o popey pce ao ad fo he popey pce self. Based o he model, s pedced ha he cue popey pce o Ko s sll abou 4% above he fudameal level based o able 4 abou 5 % based o able 3, ad moe ha 65% based o able, as of Q4. I s vey lely ha he popey pce ll move fuhe doad he fuue. 8. Coclud emas ad ossble Fuue eseach I hs pape, e examed chaes of he popey pce o Ko ece yeas houh a smple opmzao-based eeal equlbum model, hch capues he edepedece amo e, ae, ad he pce of he adable ad oadable oods. he appoach of hs pape offes a sucued ve of he elaoshp beee he popey pce ad ohe ecoomc vaables o Ko. Compaave sac esuls of he model ae obaed, hch povde a fameo ha s useful fo publc polcy evaluao ad aalyss o Ko. he pape also suess a succc mehod o esmae he fudameal value of he popey pce. Sascal aalyss dcaes ha he model fs he expeece of o Ko ell fo he peod 984Q-993Q4. Based o he model, he pape pedcs ha cue popey pce o Ko s sll abou 4% o fom 5% o moe ha 65%, accod o ohe esmaes, above he fudameal level ad may have doad adusme he fuue.

23 Fuhe sudy ca be udeae follo decos o mpove ou udesad of he ccally mpoa ssues assocaed h he popey mae o Ko. lhouh he oal supply of hous aduss elavely sloly espose o pce chaes, does deed play a exemely mpoa ole, especally o Ko s popey mae. I hs pape e have assumed ha he supply of hous s exoeously deeme ousde he model. I fac, hous supply should be edoeously ad oy deemed by popey developes ad he o Ko oveme. We should moe caefully vesae ad exame he vesme behavo he popey developme seco, employ fo example ob s q- heoy. hs ca fac be accommodaed he model f e assume he poduce s also volved he hous popey developme. he pape assumes ha hee s o oveme seco he ecoomy. Gve he pmay mpoace of fscal defc ece yeas, e ca clude a oveme seco ad vesae ho s eveues ad expeses chae espose o chaes of he popey pce o Ko. We dd o exame he balace of ade hs pape. Gve he led exchae ae ad he edoeous chae of moey supply h couous uselzed foe exchae eveo, e ca vesae he cosequeces of chaes of popey pce o he exchae ae ad balace of paymes, ad vce vesa, based o he pofolo balace appoach. 3

24 4 ppedx: Sce e Γ, he fudameal pce of popees Γ Γ E Γ Γ E Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ Γ

25 efeeces: Beae, Be, ad Ma Gele 999, Moeay olcy ad sse ce Volaly, Fedeal eseve Ba of Kasas Cy Ecoomc eve, Fouh Quae 999. Beae, Be, Ma Gele, ad Smo Glchs, he Facal cceleao a Quaave Busess Cycle Fameo, J. B. aylo ad M. Woodfod, eds., adboo of Macoecoomcs, oh-ollad,. Goodfed, Mav, ad obe G. K 997, he e eoclasscal Syhess, B. Beae ad J. oembe, eds., BE Macoecoomc ual, MI ess 997. Io, aaosh ad ouo Iasao 995, Expla sse Bubbles Japa, BE Wo ape Gelach, Sefa ad Weshe e, Ba ed ad opey ces o Ko. ape eseed a he Ba of Fad/CE ual Woshop o sse Maes ad Moeay olcy, els, pl. Kala, S, D. Mhale ad C. Dueald, opey ces ad Speculave Bubbles: Evdece fom o Ko S, IMF Wo ape W//. Ma,. Geoy, ad ad Davd. Wel 989, he Baby Boom, he Baby Bus, ad he ous Mae, eoal Scece ad Uba Ecoomcs, Vol. 9, o.. Meese, ad. Wallace 994, es he ese Value elao fo ous ces: Should I eave My ouse Sa Facsco? Joual of Uba Ecoomcs, Vol. 35, pp a, Yu Chul ad Wo-m a 995, Capal Movemes, eal sse Speculao, ad Macoecoomc dusme Koea, I Sebasa Edads, ed. Capal Cools, Exchae aes, ad Moeay olcy he Wold Ecoomy, Cambde Uvesy ess, 995. e, Weshe, Wha Dves opey ces o Ko?, o Ko Moeay uhoy Quaely Bulle 8/. e, Weshe, lla Cheu ad Cyha eu, he opey Mae ad he Macoecoomy, o Ko Moeay uhoy Quaely Bulle 5/. Schlle, obe J. 98, Do Soc ces Move oo Much o Be Jusfed by Subseque Chaes Dvdeds? meca Ecoomc eve, Vol. 7, pp

26 Fue o Ko: Cosume ce Idex /999-9/ Ja-85 Ja-86 Ja-87 Ja-88 Ja-89 Ja-9 Ja-9 Ja-9 Ja-93 Ja-94 Ja-95 Ja-96 Ja-97 Ja-98 Ja-99 Ja- Ja- Ja- Fue o Ko: omal Wae Idex Ma-8 Sep-83 Ma-85 Sep-86 Ma-88 Sep-89 Ma-9 Sep-9 Ma-94 Sep-95 Ma-97 Sep-98 Ma- Sep- 6

27 Fue 3 o Ko: vae Domesc opey ce ad eal ce Idex Fue 4 o Ko: e o opey ce ao : 98: 983:3 984:4 986: 987: 988:3 989:4 99: 99: 993:3 994:4 996: 997: 998:3 999:4 : : 98: 98: 983:3 984:4 986: 987: 988:3 989:4 99: 99: 993:3 994:4 996: 997: 998:3 999:4 : : vae opey ce vae opey eal ce 7

28 Fue 5 3 Moh IBO ad Fed Fuds ae : 983: 984:3 985:4 987: 988: 989:3 99:4 99: 993: 994:3 995:4 997: 998: 999:3 3 Moh IBO Fed Fuds ae Fue 6 o Ko: omal Wae Goh ae :4 : : 984: 985:3 986:4 988: 989: 99:3 99: : 994: 995:3 996:4 998: 999: :3 :4

29 Fue 7: Goh ae umbe of ouseholds Excess of umbe of ublc eal ous Us : 983:3 984:4 986: 987: 988:3 989:4 99: 99: 993:3 994:4 Fue 8: Goh ae umbe of vae Domesc emses ad Subsdzed Sales Flas 996: 997: 998:3 999:4 : : 985: 986: 987: 988: 989: 99: 99: 99: 993: 994: 995: 996: 997: 998: 999: : : 9

30 Fue 9 umbe of Sales ad uchase eeme Dec-9 Dec-9 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec- Dec- Dec- Fue d/dw/wd/-d/ : : 985:4 986:3 987: 988: 988:4 989:3 99: 99: 99:4 3 99:3 993: 994: 994:4 995:3 996: 997: 997:4 998:3 999: : :4 :3