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KDI Economic Outlook 2021-2nd Half
Rate Hike Impact on Macroeconomy in Different Private Debt States

November 11, 2021

KDI Report VOD
As the COVID-19 crisis drags on, the Korean economy grew at a slower pace, but household and corporate loans rapidly expanded, surpassing twice the size of GDP.



In previous economic shocks, namely the 2003 Korean credit card crisis and the 2008 Global Financial Crisis, there was a sudden decrease in debt coupled with stagnation.



In the COVID-19 pandemic, a wide array of policy countermeasures umped in a large amount of liquidity to the market. Unlike the past crises, the economy is slowing down, but debt is mounting.



As consumer and business lending increased, coupled with rising asset prices, the Bank of Korea raised the base rate for financial stability.



Anticipation of another rate hike drove up market interest rates by a huge margin.



To find out, KDI conducted a study to examine the impact of rate hikes on economic growth and inflation.



Covering 12 years from April 1999 to March 2021, the analysis divides this period into high and low debt states.



The results found that a rate increase in a high debt state led to cutting down the economic growth rate by about twice as much.



The study also found that rate hikes caused a drop in inflation and debt growth rates but without statistical significance.



Expectations of higher asset prices relative to interest costs may keep pushing the debt level up.



After all, in the short run, raising interest rates in a high debt state may have the side-effect of hindering economic recovery outweigh the benefit of suppressing debt growth.
■ The recent rapid accumulation of private debt demands policy actions to reduce the probability of financial instability.

■ Interest rate hikes are like a double-edged sword with possibilities of moderately easing some financial woes and hampering economic recovery. Accordingly, the timing and pace of the monetary normalization process need to take this into account.

■ This study recommends a policy mix of monetary and macroprudential policies to strengthen financial stability.
 
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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

    82-044-550-4725
  • CHO, Byungkoo On leave

    Director and Vice President, Department of North Korean Economy

    82-044-550-4725
  • LEE, Jongkyu

    Fellow

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  • WEE, Hyeseung Dispatched

    Research Associate

    82-044-550-4725
  • NAM, Jinwook On leave

    Specialist

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  • KIM, Seulki

    Research Associate

    82-044-550-4725
  • CHUN, Eunkyung

    Research Associate

    82-044-550-4725
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