Abstract
This paper examines the effects of the Global Financial Crisis (GFC) on investment activity in Finland and South Korea. We employed an Accelerator model to assess whether investment developments in both countries were excessively hit by the GFC. We then used structural vector auto regressions to identify the main drivers behind investment developments in both countries. First, we found that Finnish investment and output sharply declined following the crisis, while South Korea’s experience was considerably milder. The results show that the main drivers that initially depressed investment following the crisis were foreign demand and financial factors. In addition, negative domestic supply factors continued to depress investment in Finland in the years that followed, while negative foreign demand and financial factors continued to put downward pressure on investment in South Korea.
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Source: IMF
Sources: IMF, BIS
Notes
Note that while the Accelerator model is framed in terms of lags of changes in output, this does not imply that the model cannot account for forward-looking factors or expectations. For instance, an improvement in growth or income prospects may induce an acceleration in aggregate demand or output that in turn increases investment. The key assumption is that output reacts ahead of investment in response to these developments so that investment is driven by lags of changes in output. See e.g. the discussion in Kopp (2018).
In the online appendix we also provide estimates using a Band-pass filter to estimate trends in output and obtain similar results.
We used the BEAR toolbox (Dieppe et al. 2016) and run Bayesian VARs with normal-inverse Wishart priors for all the SVAR analyses.
Parameter estimates are reported in the online appendix. The results from the specification with only four lags of changes in output seem to be more robust as many of the estimated parameters in the 12–lag specification are not statistically different from zero.
We note that while it may be the case that investment was below trend in 2012–2016 in both countries, other factors such as the European sovereign debt crisis for Finland and political uncertainty for South Korea (e.g., North Korea nuclear issues and a presidential scandal) may have contributed to this. Given that investment was largely in line with trend in the intermediate years 2010–2012, we do not interpret lower investment in 2012–2016 as resulting solely from the GFC.
In the online appendix, we provide additional results from the SVAR analysis such as the impulse responses from the identified shocks.
Similarly, in an alternative SVAR, where we replace export growth with real effective exchange rates and lending spreads with credit growth (taken from the BIS) as well as including money market rates, we find that shocks associated with financial factors contributed the most to low investment for Finland, while foreign and financial shocks were the largest contributors for low investment in South Korea during the GFC. These results are reported in the online appendix.
See also Lindblad et al. (2019).
See e.g. past Bank of Finland assessments that cite several domestic factors contributing to low levels of investment since 2011, such as the contraction of the Information and Communication Technologies sector, weak domestic demand and growth prospects, excess capacity, uncertainty, and demographics (Bank of Finland 2015, 2017).
As a small open economy, the business cycle in South Korea is strongly affected by international trade and foreign investment (Park 2000; Eichengreen 2004). In particular, the competitive edge of the Korean economy that faces challenges from abroad (e.g., emerging economies such as China and India) has eroded over the last decade.
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The authors thank the editor, three anonymous referees, and seminar participants at the 2019 Korean Economic Review international conference in Seoul. Tae-Seok Jang gratefully acknowledges the funding received from the Korea Institute of Public Finance. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Bank of Finland.
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Ambrocio, G., Jang, TS. The Impact of the Global Financial Crisis on Investment in Finland and South Korea. J Bus Cycle Res 17, 321–337 (2021). https://doi.org/10.1007/s41549-021-00056-4
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DOI: https://doi.org/10.1007/s41549-021-00056-4