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KDI Economic Outlook 2020-2nd Half
The Effects of Monetary Expansion and the COVID-19 Economic Crisis

November 11, 2020

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KDI Report VOD
As the Korean government and Bank of Korea swiftly move to expand the money supply in response to the Covid-19 crisis,

the money being distributed to the market, or money stock, is rapidly rising.

Currently in Korea, housing prices continue to rise, and the real economy remains stagnant despite a rally in the stock index.

Under the circumstances, will the government’s monetary expansion be effective?

Theoretically, monetary expansion leads to a rise in total demand, including consumption and investment.

The outcome of this varies, however, depending on whether there is also an increase in supply.

If supply does increase, the relevant market, its prices and production will all grow. But if it doesn’t, it will only lead to rising prices.

In fact, an analysis of the effects of money supply for the past 20 years shows that prices tend to temporarily rise in the housing market while both price and production rise in the real economy.

This can be explained by the fact that, even with monetary expansion, the supply in the housing market cannot grow as quickly, and this can lead to rapidly rising prices.

On the other hand, in the real economy, which produces goods and services, demand rises in line with the increase in supply, and this leads to a rise in both production and price.

When KDI examined what effect this has on the Korean economy,
it was found that on a 1 percent increase in the money supply, the GDP increased by 0.5 percent over 9 months.

As for production growth, the effect was bigger in manufacturing than services because supply can be expanded relatively more flexibly.

However, due to the limited supply in some service sectors that require close contact or gather large crowds, the effects of the government’s economic policies on production could be weaker than they were during the global financial crisis.

Easing social distancing measures to resuscitate the economy has the risk of a resurgence of Covid which could lead to weaken the policy effects even further.
■ The effects of the economic policy response to COVID-19 may not be as large as they were during the past crisis due to limited production in services that require close contact and/or gather large crowds.

■ The possibility that the effectiveness of policies may have been damaged should be taken into account, and additional expansionary measures should be considered if necessary following a close review of the economic conditions.

■ Factoring in the unique features of COVID-19, financial support should be maintained to stabilize services that require close contact and/or gather large crowds, and employment.

■ Meanwhile, preemptive efforts are also needed to detect and respond to the side effects from prolonging crisis response policies to support insolvent companies, and the growing moral hazard in the financial market.
 
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Office of Global Economy
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

Main Tasks
  • Economic trend analysis, short- and long-term forecast
  • Policy study on macroeconomic management
  • Basic structural analysis on macroeconomic areas
  • Maintenance of multi-sectoral dynamic macroeconomic model
Department of Macroeconomic Policy
  • LEE. Tae Suk

    Director, Division of Analysis and Evaluation

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  • CHO, Byungkoo On leave

    Director and Vice President, Department of North Korean Economy

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  • LEE, Jongkyu

    Fellow

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  • WEE, Hyeseung Dispatched

    Research Associate

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  • NAM, Jinwook On leave

    Specialist

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  • KIM, Seulki

    Research Associate

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  • CHUN, Eunkyung

    Research Associate

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