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To begin, we analyze capital flow data in emerging economies during the three past periods of U.S. monetary policy tightening: Tightening Period 1 (June 2004 - June 2006), Tightening Period 2 (November 2014 - April 2019), and Tightening Period 3 (October 2021 - September 2022, currently in process). The results show that during the first two periods, there was a net capital inflow, while a significant net outflow was observed during the current tightening period. Net outflows were conspicuous during the early stages of Tightening Period 2, which followed a prolonged period of significant monetary policy easing, and Tightening Period 3, in which the pace of interest rate hikes have exceeded market expectations.

We then conduct a panel regression to analyze the impact of variables related to growth (growth rate differentials and commodity prices), interest rates (Federal Funds Rate (FFR) and domestic and foreign interest rate differentials), and risk (VIX and EMBI) on capital flows in emerging economies. We also compare the impact of the above determinants of capital flows between Korea and other emerging economies using a Bayesian hierarchical linear model.

Our empirical results show that growth- and risk-related variables have a statistically significant impact on capital flows in emerging economies, with a higher accountability than interest rate-related variables. However, during the current period of U.S. monetary tightening, we observe a slightly increased impact of changes in Federal Fund Rate, possibly resulting from the Fed's rapid rate hikes. Furthermore, our comparison of the impacts of capital flow determinants between Korea and other emerging economies indicates that growth rate differential and VIX have a greater impact in Korea than in other emerging economies on average, while the impact of interest rate-related variables is similar.

Our data analysis and empirical results imply that forecasting of and analyzing of capital flows in emerging economies require comprehensive consideration of various factors including the U.S. monetary policy. Importantly, the pace of interest rate hikes and the degree of monetary policy easing prior to a shift to a tightening cycle should also be taken into account. Moreover, it is crucial to note that if the Fed's monetary tightening is faster than expected or if its shift to a tightening cycle starts after a prolonged period of easing, it could result in net capital outflows and increased volatility in the external sector of emerging economies.

The results show that growth in GVCs stagnated in the 2010s and that the chains tended to have become shorter, especially in the late 2010s, due to negative shocks including some geopolitical risks and the COVID-19 pandemic. Among the various shocks, geopolitcial risks, such as the rise in protectionism and nationalism, have reduced the length of GVCs and have also diversified GVCs. The COVID-19 pandemic also contributed to shortening these GVCs, but the extent of its contribution was relatively smaller than that of geopolitical risks. This can be interpreted as meaning that corporations view policy uncertainties caused by geopolitical risks as being more persistent than shocks such as the COVID-19 pandemic.

Comparisons of the effects of GVC linkages on Korean exports from sector to sector show that the high tech manufacturing sector contributed more to export growth than low tech manufacturing, and contributions from the service sector to export growth were greater than those of the manufacturing sector. However, by period (former half and latter half of the 2010s), the positive effects of GVC linkages on export growth in the second half of the 2010s were weaker than in the first half. This was attributable to the intensification of geopolitical risks due to the U.S.-China trade dispute that took place in the second half of that period, and to factory shutdowns and logistics disruptions arising from the spread of COVID-19. Meanwhile, our exports were impacted negatively by the COVID-19 pandemic, especially through the effects of backward linkages rather than forward linkages. This can be understood that our exports were affected greatly by worldwide lockdown measures, as Korea heavily relies on overseas input factors for exports.

We can draw the following implications from the above results. First, in order to reduce the transmission effects of adverse shocks through GVCs, it is necessary to enhance substitutability through supply chain diversification. Moreover, as it is more effective for high value added industries, such as the high tech manufacturing industry and the business services industry, to participate in GVCs in order to boost exports, it is required to seek ways to invigorate these industries’ participation. Last, countries led by the U.S. are trying to exclude China and Russia, which are non-market economies, from GVCs and restructure GVCs to center on allies. As this move is expected to greatly change GVCs going forward, there is a need to establish active measures to tackle this.

This is the full version of the paper 「Incidence Analysis of Balance of Trade: The Comparison of Gross, Value-Added, and Income Trade」.

The key empirical findings are as follows. First, rising earnings variance is dominated by rising between-industry variance. While the variance of earnings has been increasing since the Global Financial Crisis, a decomposition of the variance shows a reduction in intra-industry factors, but a hike in inter-industry factors.

Second, a small share of industries (10 out of 72 categories) accounts for most of the increase in the inter-industry earnings variance. More specifically, job growth in the high-wage industries takes place with a relatively larger increase in earnings, while that in the low-wage industries occurs with smaller hikes.

Third, a combination of an increased industry premium gap and changing composition of workers through sorting and segregation leads to the widening of inter-industry earnings variance. This reflects how firms organize themselves in terms of their workforce. However, caution is needed in this process, given that excessive sorting and segregation could result in further escalation of earnings inequality and a possible restriction to labor mobility between industries in the long term.

Lastly, an increase in the employment share of large firms (500 employees or above) coupled with a significant reduction of the size premium in low-income industries also partly contributes to the rise in inter-industry differences in earnings.

First of all, we did an empirical analysis using Korean data based on the methodology of existing studies. The results show that every 1%p increase in the share of old-age population will lead to a 5.9% drop in the impact on economic growth from government spending. These results are overall consistent with those from previous studies conducted in the U.S. and in OECD countries (including Korea).

Next, previous studies noted that an aging population can act as one of the major transmission channels that weaken the growth effect of fiscal expenditure. This happens through a reduction in the labor supply, the quality of employment, and propensity to consume. This led us to develop a DSGE model that reflects the situation in Korea, and to see if an ageing population weakens the growth effect of fiscal expenditure through the aforementioned channels. It turns out that the cumulative fiscal multiplier fell from 0.78 to 0.73 two years after the proportion of elderly households with a low labor supply, low employment quality, or a weakened consumption tendency increased by 1%p. This means that in Korea, too, an aging population can weaken the growth effect of fiscal spending through the channels mentioned above.

The implications drawn from the findings of this paper are as follows. First, considering that an aging population is likely to require a heavier fiscal burden due to rising welfare expenditures and the weakened growth effect of fiscal expenditure, it is noteworthy that Korea will need to focus its efforts on securing fiscal capacity with the long-term perspective in mind. Second, as any economic downturn with an aging population will require a larger scale of fiscal expenditure than before, it is necessary to be prepared by further strenghtening fiscal soundness preemptively when the economy is in a stable condition. 

This paper calculates the balance of trade using value-added and income-based trade concepts whose importance has recently attracted more attention. We compare them with the traditional gross-based balance of trade and draw policy implications.

A comparison between 2014 and 2020 shows that among Korea’s trading partners, the share of countries with lower value-added or incomes than gains on a gross basis declined, while the share of countries with higher value-added increased. By country, Korea’s trade surplus with China was smaller on value-added and income bases than on a gross basis. However, Korea’s trade surplus with the U.S. was larger on value-added and income bases than on a gross basis. Therefore, if we calculate gains from trade only on a gross basis, we should be mindful that this can be quite different from the gains on a value-added or income basis.

In the meantime, we analyzed the bilateral trade balance of Korea’s major trading partners. We found that China’s trade with the U.S. saw the generation of value-added and income grow in 2020 compared to 2014. This implies that China’s role in global production shifted from simply delivering exports to the U.S. to gaining value-added from the U.S.

The global trade environment is changing rapidly due to changes in the industrial structure after COVID-19, trade conflicts between the U.S. and China, and the war in Ukraine. Under these circumstances, it is necessary to continously monitor the balance of trade, not only on a gross basis, but also on value-added and income bases, which can help assess the gains and losses of trade from multiple perspectives, and then to use them in setting up trade policies. 

This is the full version of the paper 「Asymmetrical Effects of U.S. Inflation Expectations & Term Premium on Korea's Yield Curve」.

A decomposition of the factors behind the increase in the number of workers among the older population shows that the contribution of the employment rate has climbed gradually, with the rise in the senior employment rate being mainly driven by the labor supply (the increase in the labor force participation rate). Despite the poor quality of elderly jobs, primarily due to low wages, the supply of elderly labor has increased significantly.

The empirical analysis shows that the increase in the elderly employment rate has been driven mainly by economic reasons, including a reduction in private income transfers from descendants and a sharp growth in living expenses relative to income from public pensions and assets, as well as by sociodemographic changes, such as the increase in spouses’ employment and improvements in health conditions. The employment rate rose faster in the group with no or low non-wage income from a public pension, private income transfers, or assets.

While the increase in elderly employment is natural considering the downward trend in the economically active population (aged between 15 and 64), an environment must be created where involuntary labor supply is reduced and voluntary supply is encouraged. It is important to broaden the income base for the low-income elderly group that has to work involuntarily, even when supplying labor is difficult for health or other reasons, by increasing social welfare spending and the size of the basic pension. It is also necessary to induce an efficient use of accumulated human capital by creating an environment where seniors can stay longer at their work through re-employment after retirement.

First of all, this paper calculates interest rate sensitivity through analyses of aggregate and micro data. Changes in household loans have a negative correlation with interest rate movements, and their sensitivity to interest rates is higher during a period of rising interest rates. For borrowers, the higher their incomes and loan-to-income ratios, the more sensitive they are to the movements of interest rates. By loan type, mortgage loans are relatively more sensitive to interest rate movements compared to credit loans. However, other factors that can affect interest rate sensitivity such as the degree of financial imbalances and the proportion of floating rate household debt were not considered in these data analyses. Accordingly, this paper also performs a stricter estimation of interest rate sensitivity using a VAR, panel fixed-effect model in order to consider additional determining factors. Our estimation results show that after the COVID-19 pandemic, the interest rate sensitivity of household debt has risen higher than before. Moreover, if interest rate levels are high, rate rises of the same degree have greater effects in terms of curbing the increase in household loans. By category, the interest rate sensitivity of high-income, highly-leveraged and younger borrowers is estimated to be higher than that of counterparts.

With respect to the estimation of interest rate sensitivity, it is judged that the policy rate hikes which started from mid-2021 not only contributed to reining in household debt growth but also had no small impact on the mitigation of financial imbalances which had been intensified. In this process, however, as for vulnerable groups such as low-income families, the elderly and vulnerable borrowers, whose interest rate sensitivity is relatively low, the effect of curbing growth in borrowing is not so great even if interest rates rise, and their burden of debt repayment could instead grow more significantly. Therefore, in times of intensifying interest rate pressure, the delinquency risk of vulnerable groups could increase, and the asset quality of non-bank financial institutions that extended loans largely to these groups could be undermined. Therefore, while continuing to make policy efforts to ease the buildup of household debt, we need to prepare for the possibility of mounting credit risk among vulnerable groups. 

The result of the analysis shows that the pass-through of import price growth to output prices has the following characteristics. First, this pass-through is attributable mainly to the shock on import prices of raw materials rather than that of intermediate goods. More specifically, the price shock on agricultural and fishery products such as grains makes a greater and longer-lasting impact than that on mineral products such as crude oil does. Next, this paper also confirmed that, in the short term, this pass-through is asymmetric and non-linear, where the degree of pass-through is higher when import prices rise rather than fall and when their growth is large rather than small. Lastly, the degree of price pass-through differs by industry depending on the proportion of imported raw material input, the price elasticity of demand, the degree of market concentration, and the possibility of prices reflecting government policies.

Looking at the characteristics of each industry in detail, in the manufacturing industry, petroleum refining, chemicals, and steel, which require a high proportion of imported raw material input, showed a greater pass-through. However, IT manufacturing and transport equipment manufacturing have low pass-through as they have a lower proportion of imported raw material input and their demand is relatively sensitive to prices. Next, in the service industry, price pass-through is not that high in general. However, transportation sectors such as aviation and shipping show a relatively high degree of price pass-through as they have higher share of raw material input and market concentration. Price pass-through is large in the construction industry where output prices are highly influenced by production cost changes. Concerning electricity and gas, while they have a quite large share of raw material input such as coal and natural gas, the price pass-through is partially limited by government policy.

The implications drawn from the above analysis are as follows. First, considering the asymmetric and non-linear characteristics of import price pass-through, it is noteworthy that even when there is a repeated fluctuation in international commodity prices, upward pressure on inflation can still be strong. In addition, when implementing price stabilization policies and economic forecasts, attention must be paid to the fact that the degree of import price might differ by industry.

The results of the estimation show that U.S. inflation expectations alone have a statistically significant effect on Korea’s yield curve during the periods of high U.S. inflation, while the U.S. term premium shock is statistically strongly significant during the low inflation period. During the high inflation periods, the shorter the maturity, the larger impact the U.S. inflation expectation shock, leading to a flattening of the yield curve. During the low inflation period, the longer the maturity, the larger impact the U.S. term premium shock has, causing the yield curve to steepen. These results show that U.S. inflation expectations and term premium have asymmetrical impacts on Korea’s yield curve.

During the current U.S. high inflation period, rising U.S. inflation expectations are forecast to act as significant upward pressure on Korea’s short- to medium-term interest rates through the monetary policy channel. This is because the U.S. has been maintaining its aggressive monetary tightening stance, including significant policy rate hikes and the implementation of quantitative tightening. In addition, upside risks to inflation are expanding and inflation expectations are rising in Korea as well, due to the global shock from rising commodity prices resulting from the prolonged Ukraine crisis, and due to the inflation expectations channel through which inflation expectations in Korea synchronize with those in the U.S. Considering these domestic and external conditions, there is an urgent need to manage inflation expectations in order to achieve the monetary policy goal of price stability. The Bank of Korea has been responding to inflation expectations more preemptively than other countries, by sending signals of normalizing monetary policy since May 2021 and by starting to raise the Base Rate in August last year. However, as inflationary pressures have been intensifying due to the Ukraine crisis, it is becoming even more difficult to manage market participant inflation expectations. Meanwhile, close monitoring is needed of the impact of the U.S. Federal Reserve's quantitative tightening, starting in June this year, on Korea’s market interest rates. Although this paper finds that the U.S. Federal Reserve's quantitative tightening did not have a significant effect on Korea’s term premium in the past, its impact is hard to predict this time given that the pace of current quantitative tightening is faster than that in the past and has been implemented together with rate hikes.

The results of the analysis show that vulnerabilities in the global supply chain are mainly attributable to the large presence of central players, such as China, the U.S. and Germany, and to the tendency to cluster via cross-border value chains. In particular, as the dependency of global trade on China rises, supply chain disruptions in China could have larger spillovers into the overall global trade network. Major intermediate and capital goods, such as electronics, petrochemical goods and base metal goods, showed greater vulnerability, as they have a higher tendency to cluster due to their greater participation in the global value chain (GVC), and as some central players have a large presence in those industries.

An assessment of Korea’s import supply chain vulnerabilities shows that the vulnerability of commodity items significantly surpassed global levels of vulnerability, while that of capital goods was found to be relatively lower, indicating that Korea has export competitiveness in global markets for major capital goods, including semiconductors and batteries. However, it was found that Korea was more vulnerable in terms of some capital goods like semiconductor equipment, imports of which are in high demand, but which are exported from only a limited number of countries with the needed technological prowess. In addition, as the dependency on China of some key vulnerable items surpasses the general global level of dependency, a deterioration in the Chinese supply chain could severely compromise Korea’s supply chain stability.

In response to these results, the following policy implications can be suggested. To deal with increasingly persistent supply chain shocks, such as the war in Ukraine and Chinese lockdown measures, policy efforts should be made to diversify the import source of, or localize production of, major raw materials and capital goods. Short-term efforts to this end could include making timely responses through inventory stockpiling and strengthening real-time monitoring. In the medium- and long-term, policy authorities should work on localizing key technologies and on securing overseas supplies for critical raw materials. Participating actively in multilateral trade agreements pursued recently by major countries would also be helpful in securing a stable import supply chain.

Results show that the large-scale exit of the elderly from the labor force and the delay in their returning to work during the pandemic are mainly attributable to the changes in working conditions caused by the pandemic, rather than changes in the labor supply behavior. A sharp drop in the number of decent jobs with private pension and health insurance benefits contributed most to the cause of the early retirement of the elderly and the delay in their re-entry into the labor market. By status in employment, the number of self-employed workers has declined more significantly than that of wage workers during the spread of the virus. This is mainly caused by the decrease in the transition between wage and salary employment to self-employment due to increased government transfer payments, the increase in the number of the self-employed closing their businesses, and the self-employed becoming non-participants (not in the labor force) due to aggravated financial difficulties from the economic lockdowns. We find that in order for retirees to return to the labor market in earnest, working conditions and overall labor demand would need to recover sufficiently to the pre-crisis level. However, even if demand conditions make such full-scale improvement, human capital loss and a decline in the will to work stemming from non-participation could delay the normalization of the labor market.

Next, we analyze the impacts of COVID-19 on wages of the elderly. Even if the unemployment spell was short, job losses have had significant negative impacts on the earned income of the elderly. Older workers experience wage scars when a worker is seperated from a job (changes of employer or business establishment), and the decline in wages has been greater when the job that an elderly worker lost is their career-job (lasting 10 years or longer). However, since job losses that occurred during the pandemic were mainly caused by disease control measures, the wage losses from losing career jobs during this period appears to be limited compared to during normal times.

Putting together all these, it is not easy to create sufficient quality jobs to incentivise older people to return to the labor force. Therefore, the imbalance between labor supply and demand in the U.S. could continue for a considerable period of time and exert upward pressures on wages and inflation.

Commodity price changes can be explained by three factors: a global factor that includes global conditions with respect to liquidity, the economy and supply chains; a block factor that includes a specific group of commodities including crude oil and grains; and an idiosyncratic factor with regard to individual products such as Dubai crude oil and US corn. Breaking down the factors causing changes in commodity prices into ① global, ② block, and ③ idiosyncratic factors shows that a considerable amount of such changes are triggered by the global factor, which affects commodity prices broadly. According to our analysis, the block factor played a major role before the 2000s, but the influence of the global factor has increased substantially since 2000 and has strengthened even more in the wake of the Covid-19 pandemic. Moreover, it is estimated that the global factor was created mainly by the rise of liquidity worldwide, and was expanded by the effect of global supply bottlenecks after the pandemic.

Next, the analysis regarding the effects of commodity price changes of each factor on inflation shows that the rise in commodity prices fuelled by the global factor affected inflation and inflation expectations more considerably and over a longer run compared to the rise stemming from the block factor. This also demonstrates that the increase in commodity prices caused by the global factor fuels inflation expectations, thus creating additional inflationary pressure. Moreover, it is analyzed that the impact of the rise in commodity prices by the global factor on inflation and inflation expectations has recently been growing gradually.

Based on the above analysis, even if the war in Ukraine is resolved, there is a possibility that the upward trend of commodity prices in general could continue. In particular, we should take note that if the rising commodity prices are translated into inflation expectations, the recent high inflation could be sustained for a considerable period of time.

First, looking at their macroeconomic achievements, new economy industries have been leading Korea’s exports and investment, thanks to their strong competitiveness. The biggest example is the rapid growth of industries for non-memory semiconductor chips, electric cars, and secondary batteries. Also corporate data indicates that companies in these industries have shown higher growth and profitability, and faster R&D investment growth, compared to those in other industries.

In terms of global competitiveness, Korea’s new economy industries have been found to have advantages in market share and growth potential, over those in other major countries, while still having room for improvement in terms of profitability and innovation. By industry, the competitiveness of the semiconductors, electric cars, and secondary batteries industries has increased, as measured by export market share and by their Revealed Symmetric Comparative Advantage(RSCA). However, the bio-tech, health, and display panel sectors have not shown any clear improvement in their competitiveness. At the firm level, companies in the new economy industries have shown high growth, driven by active investment and market entry. Their profitability and innovation, however, were found to be weaker than that at similar companies overseas.

Future risks for Korean new economy industries include supply-chain-related vulnerabilities, which have risen during the pandemic, and reduced stability of commodity supply and demand caused by the war in Ukraine. As companies in these new economy sectors increase overseas production as we go through a process of realignment in the global value chain(GVC), their contribution to growth in domestic production, investment, and exports is likely to decline. Moreover, the narrowing technological gap with overseas late-movers, such as China, could also reduce their upper hand in global markets.

The new economy industries are expected to continue their rapid growth over the coming years, leading Korea’s economic growth. This would be helped by the accelerated digital transformation and the strengthened climate change responses that have been brought about by the pandemic. Korea’s new economy industries are deemed to have gained the first-mover advantage by achieving quantitative growth through increased global market share in the earlier stages. From now on, however, qualitative growth will also need to be pursued to ensure sustainable growth, through innovative investment and the accumulation of human capital. It will also be crucial to minimize any negative impact of global geopolitical unrest or supply chain realignments by reducing any vulnerability to the commodity supply chain through a diversification of import sources for key items. Efforts should also be made to ease the adverse side effects seen during the rapid development of these new industries, such as the decline of existing industries, jobless growth, and the worsening of sectoral imbalances.

This paper estimates the changes in the life-cycle profiles of consumption due to changes in age-specific death rates―one of the most important causes of population aging. Household Income and Expenditure Survey data is used for the estimation. The results show that consumers choose lower levels of non-durable consumption as age-specific death rates decrease, suggesting that they substitute current consumption with future consumption in response to increased life expectancy. While these consumption decreases are observed in overall ages, they appear notably large at ages close to retirement, approximately after the age of 50. A historical simulation based on the estimation results and changes in age distribution between 1995 and 2016 suggests that aggregate per capita consumption decreased constantly, by an annual average of 0.9%. Both the changes in individual consumption due to lowered age-specific death rates and the changes in age distribution due to population aging played an important role in these per capita consumption decreases. Prediction results suggest that per capita consumption may decrease further until mid-2030, and that the individual consumption modification will emerge as the main channel while the changes in age distribution will work in the opposite direction with the past.

Firms’ price-setting behavior shown in the survey can be summarized into the following three characteristics: first, price rigidity has weakened compared to the 2016 survey; second, heterogeneity in firms’ price rigidities has widened relative to 2016; and third, the size of a one-time price change of a firm tends to be smaller as the firm adjusts prices more frequently. Also, prices are usually adjusted more slowly when the overall prices increase than when they decrease. The Logit regression results show that price rigidity is weaker in the manufacturing industries than in the non-manufacturing industries, SMEs rather than large companies, firms with a higher share of loyal customers and long-term contracts, and firms with more consumer and corporate customers than public institution customers.

The survey indicates two facts about firms’ inflation expectations: first, firms expected inflation to average 10.6% over the next year, which far exceeds the inflation target of 2.0%; and second, firms perceived inflation in the past year as 9.7% on average, implying that firm’s inflation perceptions tend to be much higher than the actual rate. The firms’ high inflation expectations seem to be caused by the following factors: a) an increase in firms’ perceived price-level due to rising commodity prices during the pandemic (b) the weak role of macroeconomic indicators in firms’ business decision-making (c) firms’ low awareness of inflation targeting.

These results provide a few implications regarding the effects of monetary policy: The overall effects of monetary policy decrease as price rigidity weakens. However, due to the expansion of heterogeneous price ridigities among firms, the effect of monetary policy on prices would weaken further while the real effect (on the output gap) would decrease less and persist longer. Also, monetary policy could have stronger effects in industries or firms with greater price rigidity. Meanwhile, this survey results suggest that the central bank needs to communicate more actively with firms in order to improve their awareness of inflation targeting.

Using a scenario analysis, this paper examines what impact transition risks might have on the financial system. The results show that transition risks will have a negative impact on the economy and on the financial system over the long-term. Specifically, transition risks cause a decline in the value of financial assets of carbon-intensive industries, and hence reduce the capital adequacy ratios of domestic banks by 2.6%p-5.8%p in 2050, compared to 2020. In particular, bank soundness is predicted to deteriorate more severely after 2040, when the cost of reducing greenhouse gas emissions rises rapidly. Moreover, the more banks hold financial assets of carbon-intensive industries, the more vulnerable they will be to transition risks.

Our analysis suggests that given the current situation where emission reduction technologies to ensure carbon neutrality are not commercially available for manufacturing industries, transition risks could impose considerable damage on the economy and the financial system. Moreover, unless banks respond preemptively to transition risks, financial assets vulnerable to transition risks will likely deteriorate and cause large losses at banks. The negative impacts of transition risks could be significantly reduced if the development of emission reduction technologies accelerates with eco-friendly investment by the government and the private sector. Moreover, the shock from transition risks will likely be greatly eased once financial institutions reduce their holdings of assets vulnerable to transition risks, by establishing a risk management system that incorporates the climate change risks.

The empirical analysis using the country panel model estimates that the surge in Korea’s current account surplus since 2012 has been attributable mainly to long-term structural factors and mid-term macroeconomic conditions, and the effect of these factors has been dominant since 2018 in particular. It is analyzed that the contribution of long-term structural factors to the current account surplus has exhibited a secular increase, stemming not only from demographic changes (static effect) such as the rise in the ratio of prime savers, but also from stronger incentives for saving for retirement (dynamic effect) in line with rapid population aging. Over the medium term, the increase in primary income due to the shift to positive net external assets, favorable fiscal balance compared to advanced economies, and greater GVC participation have played a role as well. In contrast, the contribution of temporary factors (GDP gap and international oil prices) has been fluctuating without showing any particular trend, and the contribution of financial factors including foreign exchange rates was not significant. Meanwhile, since this paper’s panel model does not consider country-specific characteristics, residuals tend to be large in more than a few areas when conducting a country-by-country analysis. As for Korea, it is found that the IT business cycle explains this residual for the most part.

We forecast the medium- to long-term trend of the current account based on the outcome of the empirical analysis, and find that the contributions to the current account surplus of the demographic structure, and of the fiscal balance, which has greatly affected Korea’s recent current account surplus are expected to decrease gradually in the future. The contribution of the demographic structure to the current account surplus appears to have nearly reached its peak, and is expected to transition to a modest decline due to the rising old-age dependency ratio as population aging progresses going forward. The contribution of the fiscal balance to the surplus is expected to decrease moderately in line with the increase in social welfare spending. In contrast, the gradual expansion of net external assets’ contribution to the current account surplus due to the accumulation of the surplus is likely to offset some of the decreasing contribution of demographic factors and the fiscal balance.

Given that the recent increase in the current account surplus is mainly attributable to medium- and long-term factors, the volume of the current account surplus this year is projected to be 5% relative to GDP. Moreover, even if the economy shakes off the pandemic shock and normalizes, the trend of massive surpluses is not expected to worsen in the short term. Since the current account surplus can create imbalances to the economy, excess surpluses need to be addressed. Considering Korea’s position as a country with a non-reserve currency, however, this trend of the current account surplus is assessed to contribute to enhancing external stability.

According to the results of estimation on the level of consumption inequality (based on the consumption quintile share ratio) in Korea during the period between 1990 and 2016 after correcting measurement errors, consumption inequality is seen to have increased, due mainly to the widening of income inequality. By time period, consumption inequality increased more during the period between 2002 and 2009 than during other periods. By goods, the gap in consumption between the first and fifth quintiles is analyzed to have been widened particularly in consumer discretionary goods such as education, entertainment & culture, domestic services, and transportation.

Meanwhile, the recent COVID-19 shock appears to have affected the widening of consumption inequality through changes in income and consumption conditions. First, a look at changes in income conditions shows that disposable income increased in all income groups in 2020 thanks to the increase in transfer payments by the government, while earned income decreased, particularly in vulnerable groups, due to COVID-19. A look at changes in consumption conditions reveals that the ratio of consumer staples rose sharply, as consumption of consumer staples (indoor consumption) increased more rapidly than that of consumer discretionary goods (outdoor consumption), due to movement restrictions. The level of consumption inequality (the quintile share ratio) also rose further in 2020 due to these changes in income and consumption conditions during the pandemic. By income group, the gap in consumption between the low-income group (first quintile) and the high-income group (fourth and fifth quintiles) widened. However, the consumption gap between the low-income group (first quintile) and the middle-income group (third quintile) actually narrowed, as the low-income group benefited relatively greatly from transfer payments. By category of consumer goods, unlike in the past when consumption inequality had widened in consumer discretionary goods in particular, consumption inequality deepened especially in consumer staples (indoor consumption) due to movement restrictions.

These analysis results imply that the level of inequality felt in Korean society is relatively higher when measured using consumption inequality compared to other indicators, and the trend of consumption inequality since the COVID-19 outbreak has been showing a pattern different from the past.

The volume of carbon dioxide emissions by domestic industries increased on average by 4.8% per year between 2001 and 2018, and is estimated to have reached 530 million tons as of 2018. By industry, emissions from the manufacturing sector accounted for a large share (65.9% as of 2018), among which the shares of primary metal products (25.2%), chemical products (12.5%) and coal & petroleum products (7.2%) were relatively high. In the services sector, emissions from transportation services (13.7%) accounted for the second largest share of all industries. Structural decomposition showed that, despite efforts such as technological development, a rapid expansion in domestic and global demands has caused an increase in carbon dioxide emissions. The main drivers of carbon dioxide emissions include elevated demand for exports of primary metal products and chemical products, and heightened domestic demand for transportation and restaurants & accommodation services. 

In order to assess the impact of limiting carbon emissions through carbon pricing (a carbon tax) on industrial structure and production costs by industry, without green technology or green policies, the carbon tax was set at different rates for each industry, using the scenario analysis from NGFS (2021) as reference. (Scenario 1 limits the increase in the global average temperature to between 1.5 and 2.0 degrees above pre-industrial levels. Scenario 2 limits the increase to below 1.5 degrees above pre-industrial levels.) Production costs were estimated to be rise at higher rates for the manufacturing sector compared to the services sector, with primary metal products (0.8%-4.5% on average per year between 2020 and 2050) showing the highest rate of increase, followed by processed metal products (0.6%-3.5%) and transportation equipment (0.5%-3.0%). By transmission channel, indirect effects via other industries were found to be more significant than any direct effects. Regarding industrial structure, the manufacturing sector is projected to shrink in terms of its share. In particular, the shares of transportation equipment (0.02%p-0.25%p on average per year between 2020 and 2050) and primary metal products (0.01%p-0.14%p) diminished by larger margins. Nevertheless, if substitutions among production factors resulting from changes in input prices, new government policies and technological improvements were to occur, the actual impact could be smaller.

The implementation of regulations on carbon emissions could result in a contraction of production, particularly in the manufacturing sector, if not accompanied by efforts to cut emissions. Considering that the rise in carbon dioxide emissions associated with the manufacturing sector was driven by expanded exports, a downturn in the sector would likely lead to a reduction in exports. Therefore, in order to minimize adverse effects created over the course of the transition to carbon neutrality, efforts must be made not only at the company level, including shifting to low-carbon energy sources and enhancing energy efficiency, but also at the government level by providing various support measures, such as providing financial assistance for the installation of after treatment systems and incentives for reducing energy consumption. In particular, certain industries that do not produce large amounts of carbon emissions in their production process are still expected to suffer significant damage, including higher production costs and production reductions via indirect channels. Therefore, it is important to accurately assess the degree of damage expected in each industry.

Against this backdrop, this article estimates an adjusted unemployment rate reflecting demographic changes, using a dynamic factor model (DFM). The results of the DFM-adjusted unemployment rate show that demographic changes for the past 20 years have pulled the unemployment rate down by 0.4%p. The effect of population aging (direct effect) has worked to lower the unemployment rate by 0.5%p, while an increase in participation in economic activity led by women aged 50 or higher (indirect effect) has acted to increase the unemployment rate by 0.1%p. Therefore, when comparing unemployment rates between different time periods, the unemployment rate of the early 2000s should be revised downward by 0.2%p, and the recent unemployment rate should be adjusted upward by 0.2%p before comparison. In addition, estimations of the future population suggest that demographic changes will take place faster going forward. This should therefore be considered when interpreting trends of the unemployment rate. Taking into consideration only changes in the proportion of the population, that is, the direct effect, downward pressures on the unemployment rate are expected to be greater for the next 20 years (0.6%p) than for the previous 20 years (0.5%p).

Meanwhile, the unemployment rate has showed a trend of increase over the past 10 years despite population aging acting as a downside factor. This is assessed to be attributable to the greater role played by factors inherent to the labor market, such as expanded economic participation generally, and increased mismatch unemployment in line with changes in the economic structure, relative to downward pressures on the unemployment rate from demographic factors.

The climate change response measures in major countries are developing in a way that (1) seeks to meet the emission reduction target by enhancing global and multi-lateral cooperation; while (2) strengthening the linkage with trade policies, including the consideration and introduction of a carbon border tax. In addition to emission reduction policies, major countries are also (3) planning a “green new deal,” aiming to transition to a green economy and generate new growth engines.

This paper analyzes two scenarios. The base scenario assumes the EU and the US impose a carbon border tax of 50 US dollars per ton of GHG emitted from imported goods, while the tax cut scenario assumes a reduced carbon border tax, imposing tariffs of 35 US dollars per ton. The impact of the tax on Korean exports through different channels is evaluated.

According to the analysis, the introduction of a carbon border tax in the EU and the US would likely weigh quite heavily on Korea’s exports, given the high carbon intensity of its key export industries. Korea’s exports are expected to contract by 0.5% (based on median average, approximately 3.2 billion US dollars) and by 0.6% (approximately 3.9 billion US dollars), due to the adoption of the tax in the EU and the US, respectively. The tax negatively affects exports by deteriorating the price competitiveness of Korea’s exported goods (direct channel) and by causing a drop in Korea’s intermediate goods exports to its key trading partners, such as China, who are significantly affected by the carbon border tax (indirect channel). By industry, those with high carbon intensity and those that account for a large share of Korea’s exports were analyzed to be hit hard, such as transportation equipment (automobiles and ships, a drop of 0.16%p for the EU tax and 0.15%p for the US tax), metal goods (steel, 0.10%p and 0.13%p respectively) and chemical goods (synthetic resins and medicine, 0.10%p and 0.09%p respectively). Moreover, electronic goods like semiconductors, which account for a large share of Korea’s exports to China, would inevitably suffer, as the adoption of the carbon border tax is expected to cause Chinese exports to drop, resulting in a reduction in Korea’s intermediate goods exports to the country. Nevertheless, if Korean companies are given a tax break in recognition of the emission costs the companies have covered domestically, the negative impact on Korea’s exports would be somewhat dampened.

While the Korean government is implementing a long-term plan aimed at achieving carbon neutrality by 2050, it appears that short-term responses at the company and government levels will also be necessary in order to minimize the adverse effects of the carbon border tax on the Korean economy. In the meantime, given that major countries are pursuing a green new deal in an attempt to transition to a green economy, Korean companies should take this opportunity to develop new growth engines and expand their markets.

This paper estimates the effects of the central bank liquidity swap, arranged during the COVID-19 crisis, on Korean FX markets. I analyze the daily fluctuation of the exchange rate and the covered interest rate parity deviation between February and May 2020. The liquidity swap effect is estimated using the local projection method deployed in a differences-in-differences setup. I compare the differences in FX market conditions in Korea and in 17 other countries after the liquidity swap events. Both the announcement effects and the liquidity auction effects are estimated. The results indicate that the central bank liquidity swap played a crucial role in stabilizing the Korean FX market during the COVID-19 crisis. The Korean won appreciated by 3.3% due to the announcement of the swap arrangement, and it also appreciated by 0.5% for each of the six liquidity auctions. The swap line effect on the covered interest rate parity deviation was not clear. However, I did find that the deviation was kept below the theoretical ceiling after the swap arrangement.

Based on the methodology of Schlingemann & Stulz (2021), this article analyzes how well changes in market capitalization of listed companies capture changes in their value added and employment using unrepresentativeness measures and the determination coefficient of a regression analysis. It also analyzes whether there is a stable relation between market capitalization for each industry and real economic indicators through a co-integration test from a macroeconomic perspective.

The results of the analysis show that the Korea stock market properly represents the value added of manufacturing industries but provides a relatively weak representation of the value added of all industries and the service industries. This was consistently seen in both a cross-sectional analysis using data of listed companies and a time series analysis using macro indicators.

In the case of the employment representativeness of listed firms, it is generally lower compared to value added representativeness. The employment representativeness in both the manufacturing and service industries has shown a downward trend since the financial crisis. This is attributable to the rapidly increase in the market capitalization portion of the IT manufacturing and IT service industries, both of which have relatively low job creation effects.

The results of the aforementioned analysis are closely associated with the facts that the industrial structures of the Korea stock market and the real economy differ, and the share of listed companies in the real economy (10% level in terms of value added and 4% level in terms of employment) is low. The difference in the industrial structures comes from the fact that the manufacturing industries, led by the IT industries, account for a large share of the Korea stock market, while the service industries account for a large share of the real economy.

In conclusion, the analysis results provide a couple of important implications. First, if a shock with uneven impacts on the manufacturing and service industries occurs in the future, like that seen during the COVID-19 pandemic, the Korea stock market and the real economy could show different patterns, since the KOSPI represents listed companies mainly in the manufacturing industries rather than the real economy as a whole. Second, the Korea stock market could be vulnerable to external shocks, because it mainly represents export and manufacturing industries rather than domestic demand and service industries. Third, when stock prices are used as a leading business indicator for economic forecasts, it should be noted that Korea stock prices provide information mainly about manufacturing production and exports, not the entire economy.

After the global financial crisis, the upward trend of the unemployment rate was found to be driven primarily by the continued decline in the labor flows into employment than by the flows into unemployment. It is attributed to several factors: a) the weakening of job creation capacity due to the changes in the industrial structure including automation and decline in the number of new start-ups amid rising economic uncertainties, and b) the increased labor supply due to the younger generations’ extended period of jobseeking as their education level rises and to the increase in women’s participation in the labor market.

In terms of the cyclical variation in the unemployment rate, the labor flows into unemployment show a relatively clear countercyclicality which has been weakened since the global financial crisis, resulting in a far weaker correlation between cyclical variation and the business cycle. This weakening in the correlation appears to have been driven by several factors: a) retirees, remaining in the labor market, b) automation in the manufacturing industries, c) offshoring in labor-intensive sectors, d) the strengthening of direct employment policy by the government, and e) the rigidity in the labor market. 

Korea recorded an elevated level of unemployment rate in 2020, which is greatly attributable not only to the pandemic, but also to the upward trend of the unemployment rate which has continued since the global financial crisis. The cyclical component of the unemployment rate also rose sharply relative to 2019, approaching the level seen during past economic recessions.

At the initial stage of COVID-19, disease control and lockdown measures were recognized as matters of medical necessity for managing the outbreak of an infectious disease to prevent the health system from being overwhelmed. However, as such measures limited economic activity for a considerable period of time due to the prolongation of the pandemic, disease control and the economy started to be recognized as an inseparable “matter of choice in consideration of social welfare.”

Thanks to the government’s strict disease control measures to date, Korea is assessed to have been relatively successful compared to other countries at limiting the increase in the number of infections. Vaccinations have recently begun, with the goal of attaining herd immunity by around the end of this year. However, voluntary participation in disease control efforts has weakened due to the public’s pandemic fatigue and economic burden, and as people let down their guard following the introduction of vaccines. As a result, the possibility has been raised of the efficacy of disease control being reduced. Based on the results of a quantitative analysis, the spread of COVID-19 is greatly affected not only by disease control at the administrative level, but also by the degree of voluntary participation in those efforts by economic agents. In general, Koreans have been observed to have adjusted their mobility voluntarily in line with COVID-19 conditions. With the spread of COVID-19 showing signs of prolongation, there should be an awareness that individuals’ cooperation and voluntary participation in disease control are essential in order for the medical and administrative disease control systems to be operated in a sustainable and effective manner.

According to a recent empirical analysis of highly vaccinated countries such as Israel and the UK, mobility is found to have increased sharply as people became less alert to the virus risk during the vaccine rollout. This implies that mobility could increase substantially in Korea as well after vaccinations are carried out. Therefore, the risk of additional spread must be prevented by carrying out vaccination and disease control hand in hand to prevent people from letting down their guard. For instance, it is important that voluntary participation in disease control continues through mask-wearing in addition to social distancing measures for a considerable period of time until herd immunity is achieved.

Should a similar pandemic crisis occur in the future, consistent disease control measures should be implemented at the initial stage of the outbreak in consideration of sustainability, from the perspective that disease control is a part of economic fundamentals. Consistent disease control measures could cause severe economic damage in the short term, but compared to a lax approach they are expected to lead to greater sustainability in the medium to long term. According to the results of an analysis based on an infectious disease spread model (SIR-DSGE), lowering the number of infections to a sufficiently low level will reduce future GDP losses, even if it means implementing strict disease control measures at the initial stage.

According to the results of the estimation of the labor market mismatch index, the industry mismatch index has risen sharply since the pandemic. This is mainly due to two factors. First, as COVID-19 has unevenly affected the business conditions of individual industries, the gap between job openings and applications has widened greatly, with labor supply and demand conditions showing differentiation among industries. Second, matching efficiency, the measurement of how efficiently job openings are matched with applications in the job market, has been declining since 2020. This appears to be mainly attributable to a sharp increase in the number of people who are discouraged from searching for work amid the ongoing coronavirus shock. It is still too early to judge that mismatch has worsened structurally, since the employment shock from the pandemic is still continuing. However, in light of the experience during the global financial crisis when the job mismatch index rose sharply and then remained high for a considerable period of time, we cannot rule out the possibility that the current employment shock will become firmly entrenched as a structural problem.

Labor market mismatch has negative impacts, such as a rising unemployment rate, sluggish recruitment, and falling labor productivity, and such impacts have become greater since the pandemic. Last year, the unemployment rate stemming from mismatch increased considerably, and as a result, the fall in the job-finding rate increased. In addition, it is assessed that there is considerable inefficiency in labor allocation among industries and the consequent losses in labor productivity increased greatly to 1.9% in 2020.

If labor market mismatch becomes firmly entrenched, the employment recovery could be delayed for a considerable period of time, due for instance to a scarring effect, and losses in labor productivity stemming from inefficient labor allocation could increase further. To mitigate these effects, information asymmetry between firms and job seekers should be eased by facilitating public and private employment support services, and labor restructuring among industries should be induced by strengthening job training particularly in understaffed industries. It is also necessary to enhance labor productivity.

Given this, this paper analyzed the impact of the deployment of industrial robots on employment in a given industry in Korea. First, using data of the International Federation of Robotics (IFR) and relying on Acemoglu and Restrepo (2020), the adjusted penetration of robots (APR) by industry was estimated. The estimates showed that, after 2010, the APR in the automotive, electronic components, and computer sectors rose faster than in other sectors. Next, by setting the APR of Korea as an explanatory variable and the APR of European countries as an instrumental variable, a two-stage fixed effects model was estimated. The results of the estimation showed that, during the period following the global financial crisis (2010 to 2018), a single-unit increase in the APR led the employee growth rate and real wage growth rate in a given industry to decline by 0.1%p and 0.3%p, respectively. This finding suggests that the deployment of robots, which has progressed rapidly since 2010, has generated a labor-displacement effect across industries. It is to be noted, however, that this study considered only the effect of robot installation on the employment of a given industry. Going forward, further studies are necessary to examine the effects of robots on productivity across industries and new industry creation.

The role of robots is expected to expand steadily in tandem with the advancement of robotics, AI, and ICT. In particular, as digital transformation accelerates following the COVID-19 pandemic, robot deployment is likely to accelerate. In this process, new high-value-added industries need to be actively explored and sectoral labor mobility enhanced so that the improved productivity brought about by robotics leads to the creation of new tasks, thereby increasing jobs.

In light of this, this paper looks into GVC changes associated with Korea, using the World Input Output Database recently published by the ADB, and analyzes their impacts on Korean exports. In the wake of the global financial crisis, Korea is assessed to have undergone the following structural changes in terms of its GVC participation.

First, as the proportion of intermediate goods exports including materials and parts increased, Korea’s position in GVCs moved upstream.

Second, Korea’s GVC participation rate, index of the degree of use of global value chains, due to the spread of global trade protectionism and to the relocation of domestic finished-good production facilities, has declined recently, led by the backward GVC participation rate.

Third, Korea’s dependence on China for exports has grown heavily, as seen in the increasing proportion of Korea’s intermediate goods exports being processed overseas and consumed or invested in China, and in the growing share of China for Korea’s value-added in exports of final goods. Lastly, the role of Korean companies in providing intermediate goods to Asian regional GVCs has expanded.

To estimate the effects on exports of changes in Korea’s GVC participation structure, we break down Korea’s annual export growth rate (based on nominal value-added exports) into three factors, including global final demand, changes in GVCs and value-added rates, and calculate each factor’s contribution. The analysis shows that since the global financial crisis, the slowdown in Korea’s export growth (annual average of 10.4% from 2001 to 2011 → 1.9% from 2012 to 2019) was attributable mostly to the decline in the contribution of global final demand (10.8%p → 1.4%p) in line with an economic downturn in China and other major economies around the world. Changes in GVCs (1.2%p → -0.3%p) also had negative impacts on Korea’s exports, as their contribution turned negative after the global financial crisis.

It seems that various factors, such as the spread of trade protectionism, the relocation of exporting company production facilities, the conflict with China over THAAD, and geopolitical risks due to U.S.-China trade conflicts, have weakened GVCs between Korea and other major economies. Structural changes in GVCs are expected to accelerate going forward due to the effects of COVID-19, persistent trade protectionism and technological advancement in line with the Fourth Industrial Revolution. It is a prevalent view that these changes in conditions will lead to a rise in reshoring, more stringent regulations of major export items, and both the localizaton and globalization of global supply chains, weakening GVCs in the end. In order to effectively handle these structural changes in GVCs, Korea needs to develop new engines of economic growth, enhance the competitiveness of its major export items, and diversify its supply chains for intermediate goods, such as materials and parts, while minimizing any adverse effects of trade barriers by actively participating in trade agreements within and outside the region.

Nevertheless, a prolonged economic slump could cause a level-up of the saving rate, as households show behavioral changes in the form of heightened propensity to save and income inequality worsens. First of all, a continued slowdown of employment and income coupled with a reduction in government income assistance could lead to a decline in households’ expected future income, and subsequently to increased precautionary savings. Meanwhile, if access to financial institution loans becomes limited due to heightened credit risk in the overall economy, households could save more so as to reduce debt and secure future income capacity. Moreover, if the crisis persists, the income level of low-income groups could decline more sharply compared to that of high-income groups. Given the low-income households’ lower propensity to save, the propensity to save for households overall could rise due to the composition effect.

The level-up of the saving rate as explained above could lead to a continued consumption slump, possibly reducing the effectiveness of stimulus aimed at boosting domestic demand in response to sluggish consumption. Also, economic volatility could escalate as a result of a decline in the share of consumption, which has relatively low volatility, in the economy. In the longer-term horizon, as savings (fund supply) start to exceed fund demand for investment, the secular stagnation of low growth, low inflation and low interest rates could become the new normal.

This paper looks into the economic impact of households’ higher propensity to save, using dynamic stochastic general equilibrium (DSGE) model analysis. The change of households’ time preference, reflecting the change in propensity to save, implies that households have been showing higher preference for future utility since the global financial crisis. Based on impulse response analysis, this paper also finds that a higher preference for future utility results in a decline in current consumption, leading to an employment contraction and downward pressure on inflation.

In this paper, we analyze financial constraints for Korean manufacturers using corporate financial statements (KIS-value DB) between 2008 and 2018. Financial constraints for companies are estimated based on the difference-in-difference approach. The results show that Korean manufacturers experienced financial constraints during the period between 2009 and 2011 and in 2017. The backgrounds behind these results are as follows. After the GFC, market interest rates rose sharply and financial institutions became more conservative in their lending practices as their financial soundness deteriorated. Whereas in 2017, the financial condition is characterized by a combination of (i) reduced credit supply due to the rise in credit risk and tightened financial regulations and (ii) the growth in corporate fund demand in line with the global economic recovery. By size, small- and medium-sized companies were affected more by financial constraints than large ones during both periods. By productivity level, financial constraints for low-productivity firms were greater than for high-productivity ones between 2009 and 2011, while in 2017 constraints for low-productivity firms were estimated to be insignificant. This implies that the cleansing effect of financial constraints might have recently weakened. 

The analysis results show that corporate credit policy should not stop at simply easing financial constraints, but should aim to enhance the efficiency of resource allocation and minimize the negative impacts of financial constraints such as contraction in investment, through strengthening the loan screening process of financial institutions.

The analysis of the employment-to-population ratio by factor shows some stylized facts. First, weaker growth in the employment-to-population ratio is attributable to a moderate increase in the economic activity participation rate. It is also due to the fact that the effect of employment growth stemming from the output increase has shrunk greatly due to a secular decline in the economic growth rate. By industry, the service sector has been leading a slower growth in the employment-to-population ratio. This is because changes in the service sector employment mostly explain changes in the overall employment, as the service sector has lower labor productivity and accounts for a higher share of aggregate demand, compared to the goods sector, such as the manufacturing industry. Within the service sector, decelerated growth in employment is evident in certain industries that have a high proportion of self-employed businesses, such as accommodation & food service activities, and wholesale & retail trade. 

The simulation test using a two-sector general equilibrium model (goods and services) shows that changes in the employment-to-population ratio since the 2000s have been largely accounted for by changes in the service sector. In a scenario where the economic activity participation rate would decline, the employment-to-population ratio is estimated to have decreased more in the service sector than in the goods sector. When we relate this result to recent economic conditions, if declines in the economic activity participation rate are entrenched amid the prolongation of COVID-19, there is the possibility of a huge employment shock, mainly in the service sector. 

The growth in the employment-to-population ratio in Korea could be restrained even further in the future by changes in the industrial and job structures, reduced economic participation of prime-age labor force, etc. Therefore, maintaining an upward trend in the employment-to-population ratio is all the more important to boost growth potential. In particular, as job growth slowdown is highly likely to be most evident in the service sector, it is necessary to continue to encourage women and the elderly — who make up a large share of the labor force in the service sector — to participate in the labor market. At the same time, multi-faceted efforts are needed to enhance employment capacity in the service sector, such as diversifying employment forms, e.g., part-time work, and cultivating the producer service industry which plays a key role in creating jobs. In such a situation where the COVID-19 pandemic has led to the contraction of employment and economic activity mainly in some service sector which requires high degree of face-to-face interactions, it is necessary to ease the employment shock through policy support for maintaining jobs in the corresponding sector.

Bank of Korea has been using the BOK12, a traditional Keynesian simultaneous equation model, along with dynamic general equilibrium models, such as the BOKDSGE, to analyze responses of macro variables to economic shocks. As a backward-looking model based on the estimation of behavioral equations, the BOK12 is subject to the Lucas critique in that it does not reflect economic agents' rational expectations for the future. However, numerous central banks continue to run similar models due to their flexibility and highly accurate forecasting power.

As the BOK12, constructed in 2012, has been limited in its ability to reflect recent changes in economic conditions, the Bank of Korea has reconstructed the BOK20 model to supplement it. The BOK20 model extends the end of the estimation period from the existing end-2011 to Q1 2019 and reflects changes in economic variables stemming from the revision of the base year for the national accounts statistics to 2015. The BOK20 model also reflects recent changes in economic theory and economic structure, including monetary policy endogeneity, changes in the demographic structure, increased uncertainty, and changes in foreign trade conditions. Besides, as local governments and social security funds have recently taken up larger shares in the general government, the relationship between the consolidated fiscal balance and the national accounts has weakened. In this respect, in the new model, the fiscal sector has been aligned with the national accounts. This paper explains the main improvements in the newly constructed BOK20 model, and its structure and features, and derives the elasticities of macro variables to economic shocks, which form the basis of macroeconomic forecasts and policy analyses.

It is assessed that the drop in startups is attributable mainly to changes in demographics and to fiercer global competition. It turns out that corporate aging, stemming from a reduced number of startups, slows the rate of increase in labor productivity, and thus has a negative impact on the economy’s capacity to create jobs. Specifically, due to changes in age distribution by company, the growth rate of labor productivity and the rate of net job creation declined by 2.1%p and 1.2%p, respectively, between 2017 and 2018, compared to that between 2001 and 2002. As the proportion of young companies with high employment flexibility falls, the relationship between the economy and employment seems to have weakened, which implies that a decline in startups can lead to an economic recovery without any job creation.

There are limitations in responding to major factors behind the decline in startups, such as changes in demographics and fiercer competition. Also, the recent COVID-19 pandemic is very likely to restrict the new entrance of businesses into the market for some time. Considering that Korea’s product market regulations are at one of the highest levels in the OECD, regulatory reforms to ease entry barriers for businesses could be considered as a policy option.

The major characteristics and contributions of this paper are as follows: First, this paper includes an SIR (susceptible, infected, recovered) model in the new Keynesian DSGE model in block form. The SIR model is a representative model used to study and forecast the spread of infectious disease. Specifically, it is structured such that the number of confirmed cases and the degree of quarantine measures generated from the SIR model block affect economic variables within the DSGE model. Second, this paper presents methods to analyze the effects of COVID-19 on small-open economies like Korea. Notably, we structured the model such that small-open economies would be affected by COVID-19 through two channels. One is a channel through which the domestic spread of COVID-19 has a direct negative impact on the domestic economy (direct channel), and the other is a channel through which the global spread of COVID-19 hurts the global economy and thereby affects the Korean economy (indirect channel).

The setting of the model and estimation based on it shows that the number of future confirmed cases and the economic effects will largely depend on the degree of quarantine measures when there is a high number of confirmed cases as now. Moreover, in the case of a small open economy like Korea, it is necessary to carefully consider not only domestic but also global COVID-19 developments.

To do this, we first analyzed trends in the frequency and size of changes in product prices by firms, using weekly price data on 150 basic necessities (collected by the Korea Consumer Agency) for the period between January 2014 and September 2019. The analysis revealed the following characteristics: first, the frequency of price adjustment, representing the share of products whose prices have changed on a monthly basis, declined gradually since 2015, with the pace of decline accelerating beginning in 2019. Second, unlike the frequency of adjustment, the average rates of price increase and decrease, compared to prices in the immediately preceding period, showed an acceleration, suggesting a tendency among firms toward larger price adjustments than in the past. Third, when the rate of price increase was broken down into the contributions of the frequency and size of adjustment, price increase appeared more closely associated with the frequency than the size since 2017. Fourth, an empirical analysis of price adjustment behavior according to the level of inflation found that in a low inflation environment, firms tend to lower the frequency of adjustment, but increase the size of adjustment.

What this implies is that under a low inflation environment, firms tend to not immediately reflect upward price pressure in their prices, but make a sizeable adjustment when they do make one. The fact that the price adjustment behavior of firms is affected by inflation provides micro-evidence suggesting that economic conditions may have less influence on inflation than in the past and the relationship between the two may be changing. However, due to the limited availability of data, this study was restricted to a small number of products. Further study using a broader set of price data, including service prices, would be needed to be able to draw a general conclusion.

First, the digital transformation taking place in the global economy and the expansion of electronic commerce have caused big-tech and fintech companies, which have grown on the back of these industries, to emerge as new competitors to the incumbent banks. Moreover, demographic changes such as the acceleration of population aging and the rise of the millennial generation are creating a wide range of financial demands to which the banking sector must respond. The persistent low-interest and low-growth environment has led to a narrower net interest margin and a decline in loan demand, creating concerns over deteriorating profitability for banks. Meanwhile, fintech businesses are subject to increasingly laxer regulations thanks to regulatory reform. Against this background, banking industries around the world are expected to undergo structural changes and, as a result, are likely to take one of the following three forms, depending on the level of information technology development, the market share of incumbent banks and the level of regulations: i) an industry centering on incumbent banks; ii) a co-existence of incumbent banks and fintech companies, competing against big-tech companies (internet-only banks, etc.); or iii) a new financial ecosystem centering on big-tech companies.

This paper looks into the conditions surrounding domestic banks as they respond to the changing economic environment at home and abroad. While major global banks are making strenuous efforts and large investments toward digitization, the domestic banking industry has seen little progress in this area due to cost, human-resource, and governance constraints. Korean banks are seen as lacking sufficient incentives to innovate so as to satisfy various financial demands, because their assets consist largely of guaranteed loans due to the oligopolistic structure of the Korean banking system. In addition, domestic banks are facing difficulties in enhancing profitability in the low-interest, low-growth environment, as their profit model is centered around interest income.

In order for domestic banks to enhance competitiveness and thereby increase profits and ensure stability under these circumstances, multifaceted efforts are needed in addition to industrial restructuring. Considering the stability of the financial system, the level of entry regulations to the banking industry, and the minimization of necessary costs to enhance competitiveness, it seems desirable that the domestic banking industry take the form of co-existence and cooperation between incumbent banks and fintech companies, while competing against internet-only banks. In response to the expansion of the digital economy, digital platforms for various financial transactions should be built, while working towards offering customized financial products designed to meet the needs of individuals based on big data. In order to respond to demographic changes, financial products designed specifically for the elderly and millenials should be developed, while creating an environment that enables convenient use of digital devices. Also, for the banking sector to step out of the relatively small domestic market and go global, banks need to have localized business models tailored to each market by, for example, focusing on mobile platforms or mobile application services. In order for these efforts to materialize, digital transformation must be undertaken in a swift and efficient manner, making greater use of existing digital infrastructure and recruiting and nurturing specialized staff. In addition, banks need to closely cooperate and enter into partnerships with fintech companies while ensuring a stable governance structure so that these efforts can be consistently carried forward.

In order for domestic banks to effectively respond to the changing economic environment at home and abroad, appropriate regulations and policies must be put in place. The vitality of the banking industry can be maintained by promoting competition through easing regulations regarding entry and business operations. At the same time, financial stability must be ensured by devoting efforts to identify and respond to potential risks such as deteriorating business soundness, worsening procyclicality and escalating credit risks. Lastly, worker re-education and training systems need to be established so that staff restructuring, which is inevitable in the process of digitization, does not result in the loss of high-quality workers.

Leveraged exchange-traded funds (ETFs), which aim to achieve a certain percentage of yield on their underlying assets, such as stock price indexes, have been growing rapidly since their introduction as more attention has been placed on their merits: the provision to market participants of high-return investment opportunities with low transaction costs. Increases in leveraged ETFs have worked positively in financial markets, in that they supply liquidity to underlying asset markets and offer investors instruments to use diverse investment strategies. However, concerns have been raised steadily in the U.S. and other major countries that leveraged ETFs can heighten volatility in stock and other underlying asset markets. In the case of Korea, leveraged ETFs account for a higher proportion of the overall ETF market than in other major countries, and there has been continued concentration in equity-type products. In addition, although the asset size of the leveraged ETF market is not large compared to that of the underlying asset market, leveraged ETFs are likely to affect markets when circumstances change due to their high transaction turnover rate. Accordingly, this article has conducted an empirical analysis of what impacts leveraged ETFs that track Korean stock indices have had on stock market volatility.

The analysis found that leveraged ETFs have had significant impacts on the volatility of domestic stock indices. Spillover effects have been found: shocks in leveraged ETF markets increased volatility in yields on the KOSPI 200 and KOSDAQ 150 indices. Moreover, with the growing size of the leveraged ETF market, the higher the share of assets held by ETFs in stock markets, the higher the volatility of the stock indices.

As leveraged ETFs are expected to show continued growth going forward based on their advantages, such as ease of making transactions, it is necessary to pay continued attention to their impacts on the volatility of stock and other underlying asset markets. In addition, various policy efforts should be made to encourage the sound development of leveraged ETFs. It is necessary to ease the concentration of leveraged ETFs in specific markets by developing a more diverse range of products. At the same time, continuous efforts need to be made to protect investors by strengthening information disclosures.

The propensity to consume remained largely unchanged from 2000 to 2012, with the exception of 2003 when the credit card crisis hit. Starting in 2012, however, it fell continuously before slightly rebounding after 2015. This development is distinguished from that seen in 2003 when the decline was immediately followed by a recovery over a short span of time.

In order to assess in detail the characteristics of the recent change in the propensity to consume, this paper breaks down the factors behind it into age groups of heads of household and into income levels, using micro-data from the Survey of Household Finances and Living Conditions and applying the method proposed by Kwon Kyu Ho and Oh Ji Yoon (2014). According to the result of the analysis, the recent decline in the propensity to consume was driven by households headed by those in their 50s and by high-income households. In addition, a look at the factors by spending purposes using the household final consumption expenditure data under the National Account shows that clothing, food and shelter-related basic necessity expenditures led the drop in the overall propensity to consume.

This paper then looks into what impact the characteristics of households, such as the age of the head of household and the income level, has on the propensity to consume through an empirical analysis, using the model of Paiella (2007) and Arrondel et al. (2015). It then interprets the results by applying the permanent income hypothesis. The analysis result shows that the changes in future expected income of households headed by those in their 50s and 60s explain the changes in the overall propensity since 2012 relatively well. In spite of the rapid pace of population ageing in Korea, the elderly do not yet have stable sources of income, resulting in a high level of concern about future income, particularly among households headed by those in their 50s. This sense of anxiousness is presumed to have caused to a significant extent the post-2012 decline in the propensity to consume. However, the government’s measures to strengthen its social-welfare policy led to an improvement in the living conditions and income satisfaction of the elderly, slightly slowing the rapid drop in the propensity to consume. Meanwhile, the result of the empirical analysis on the impact of household assets on the propensity to consume by age and income level shows that the wealth effect tends to decline as the age of the head of household rises and as the income level drops. This implies that the wealth effect could weaken as population ageing advances.

Based on the above empirical analysis, we can draw the following conclusions. First of all, considering that the recent change in the propensity to consume is largely affected by population ageing, which is a structural factor of the Korean economy, it will be difficult to return to the level seen in the early and mid-2000s. Secondly, given that households headed by those in their 50s respond sensitively to changes in future expected income, close attention should be paid when pursuing relevant policies going forward so as to avoid any rapid change in future expected income. Lastly, considering the rapid growth in the share of population aged 60 years or older, whose propensity to consume is relatively insensitive to changes in wealth, policymakers should pay attention to the structural changes taking place in the wealth effect when conducting future monetary policy.

As the US dollar’s status has strengthened as a global safe haven, global factors, such as US monetary policy, seem to have had considerable impacts on financial markets in other countries. In consideration of this, this paper looked at the impacts of US monetary policy on domestic bond and FX swap markets through an event study.

According to our analysis, US monetary policy had significant positive impacts on domestic interest rates. In particular, it turned out to have bigger impacts on long-term products with high term premiums. By period, the correlation between US monetary policy and domestic interest rates was not significant before the financial crisis, but was clearly positive after the crisis. The US conventional monetary policy was seen to have big impacts on short-term and medium-term KTB yields, while its unconventional monetary policy had major impacts on long-term KTB yields. Moreover, swap rates in the FX swap markets reacted very sensitively to US monetary policy shocks before the financial crisis, while they did not show any significant reactions after the crisis.

Our analysis, showing the growing influence of US monetary policy on domestic long-term Treasury bond yields, implies that closer monitoring is needed of monetary policies in the US and in other major economies and of their impacts on domestic financial markets. Considering that global factors have greater influence on domestic financial markets, if an appropriate FX-related macroprudential policy is used to ease capital flow volatility, the effectiveness of our domestic monetary policy could be enhanced. Meanwhile, as the weakening sensitivity of FX swap market price variables to US monetary policy can be due partly to the current account surplus trend, it is understood that it must be necessary to work to maintain the current account surplus at adequate levels.

The factors limiting labor mobility can be categorized into two aspects – labor demand and supply. First of all, labor demand is weakening, affected by automation and other labor-saving technological advances in highly productive industries. However, while the weaker labor demand works as a factor causing the “decline in labor mobility into highly productive industries,” it cannot explain the phenomenon of the “widening wage gap between high- and low-productivity industries.” Meanwhile, in terms of labor supply, the costs of migration to highly productive industries, including the costs incurred in learning technologies, have been on the rise. This can explain not only the phenomenon of decreasing labor mobility into highly productive industries but also that of the widening wage gap.

For analysis, we set up a two-sector general equilibrium model and incorporated inter-industry mobility restrictions on the labor supply front. The analysis result shows that labor mobility between industries in Korea has become more rigid. The increased constraints on labor mobility are estimated to have heightened the wage gap between industries and led to the inefficiency of labor misallocation, causing economic losses through GDP erosion.

When labor mobility rigidity worsens in this way, not only could the labor market dualism be entrenched but also labor productivity in the economy as a whole could decrease and growth potential could be impeded. Therefore, it is critical to create conditions for mitigating labor mobility restrictions.

To address this problem, we established a flow approach to labor market forecasting. The main idea behind our approach is as follows: unemployment at a given time can be thought of as the amount of water in a bathtub, a stock. Given an initial water level, the level at some future time is determined by the rate at which water flows into the tub from the faucet and the rate at which water flows out of the tub through the drain. What is important here is that the inflows and outflows have different time-series properties, and their contributions change over the business cycle. Therefore, focusing on the flows allows us to capture the asymmetric nature of unemployment movements.

A flow-based forecasting model with the theory of equilibrium unemployment and simple time-series techniques outperforms the survey of professional forecasters and other time-series models. More specifically, in forecasting the unemployment rate one year from now, our model achieves a root-mean-squared error (RMSE) about 10 percent below that of the survey of professional forecasters, and 47 percent below that of VAR models. In addition, our model has better predictive ability in times of business cycle turning points and when the unemployment rate rises.

To be specific, we selected an emerging market economy (EME) vulnerability index and major economies’ exchange rate volatility against the US dollar as the external stability indexes and examined the effects of current account balance changes on external stability. First, a panel regression model was used to analyze the impacts that the current account balance has on the EME vulnerability index and on advanced and emerging market economies’ exchange rate volatilities. We then assessed the long-term relationship between the current account and the real effective rate and estimated the short-term effects of the shocks from current account-related news on the won/dollar exchange rate in the case of Korea. The analysis results showed that the current account has a significant impact on the EME vulnerability index. Meanwhile, an improvement in the current account balance eased exchange rate volatility in EMEs rather than in advanced economies and led to a rise in the real effective rate over the long term. Last, the positive shock of a higher-than-expected current account balance was estimated to result in a stronger won immediately after or two days after the release of the statistics.

Korea’s vulnerabilities are assessed to have been the most favorable among EMEs. Even amid financial unrest in some EMEs since the global financial crisis, Korea has witnessed continuous foreign investment flows into its market, showing no sudden exchange rate fluctuations. Judging from this paper’s empirical analysis, the solid current account surplus has contributed substantially to maintaining such external stability. If the amount of the current account surplus decreases within the expected range, the negative side effects on vulnerabilities will not be large and could act as a factor weakening upward pressure on the real currency value over the long term.

The results of the analysis indicate that global inflation has been exhibiting a downward trend since the global financial crisis, and more specifically since the fourth quarter of 2011, and that global trend inflation has had an increasing impact on the trend inflation of individual countries. Looking at Korea, fluctuations of trend inflation are better explained than those in major countries by global factors, and this trend has recently been strengthening even further. Global factors are also analyzed to have growing impacts across the goods and services sectors.

Such growing influence of global factors on Korea’s inflation may work to slow down the pace at which inflation converges to its target level. In this regard, it seems necessary to continue analyzing changes in inflation dynamics and the resulting inflation forecast path, while strengthening communication with economic agents.

The re-estimation of Korea’s potential output growth using modified and supplemented methodologies shows that it is declining faster than previously forecast. The potential output growth for the 2016-2020 period is estimated at a range of 2.7-2.8%, 0.1%p lower than the original forecast of 2.8-2.9%, and the rate for the 2019-2020 period is estimated at a range of 2.5-2.6%.

Looking at the contributions of individual factors to the potential output growth, the decline in the potential output growth since 2010 is accounted for by the slowdown in the growth of production inputs such as labor and capital amid stagnant total factor productivity growth. More specifically, the decrease in the contribution of labor input is mainly due to the slowdown in the growth rate of population aged 15 or higher. The contribution of capital inputs has declined because investment growth has fundamentally slowed with the maturing of the Korean economy and heightened uncertainties at home and abroad.

Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate. In this regard, in order to expand the growth potential, it is important to enhance productivity through structural reform across the economy. Deregulating excessive regulations, lowering barriers to entry and reducing labor market inefficiency will be imperative to encourage technological innovation and improve the efficiency of resource allocation. In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate.

We estimated ET-COIN using the same method as existing indices such as BOK-COIN and Eurocoin, by projecting the target on the medium- and long-run components with waves of period longer than one year, extracted from export-related variables. Given the high volatility of export indicators, however, we adopt the elastic net regularization to identify only the variables closely related to exports.

A comprehensive assessment shows that ET-COIN is useful for analyzing the trend of exports. First, ET-COIN is found to capture the export trend well, with short-term and idiosyncratic factors removed. Unlike bandpass filters, it has high end-of-sample stability, as estimates do not fluctuate dramatically even after new time-series data are added. It also has excellent qualities as estimate for the current-quarter goods exports. Given the frequent changes in export conditions driven by uncertainties surrounding the external environment, we plan to expand the range of export-related variables included in ET-COIN, while continuing to monitor and improve the adequacy of the index for the assessment of export conditions.

An individual’s employment status changes over time as he or she moves among the employed, unemployed and economically inactive populations. The transitions among these statuses, or worker flows, allow us to identify the underlying movements of the labor market that cannot be explained by stock indicators such as the employment and unemployment rates. This paper measures transition rates using the Economically Active Population Survey microdata and examines characteristics and structural changes in worker flows.

According to worker flows during the period between 2000 and 2018, the contribution of the job separation rate to unemployment fluctuations was found to be higher than that of the job finding rate. The job separation rate also exhibits strong countercyclical behavior, suggesting that corporations have a tendency to cope with business cycle volatility by adjusting the number of existing employees rather than hiring new recruits.

In addition, worker flows have exhibited a slowing trend since 2010. With the job finding rate, in particular, continuing to decline, the job creation capacity of firms has been weakening. The slowdown in worker flows is attributable to the combined effects of a decrease in the amplitude of the business cycle and changes in the economic structure. If this trend persists, however, it could have negative effects on labor productivity in the future.

As prices of major import/export items, such as oil and semiconductors, have recently fluctuated significantly, there is growing interest in the impacts of changes in Korea’s terms of trade (net barter basis) on the domestic economy. An examination of past movements of the terms of trade and the domestic economy shows that there were times when both the terms of trade and the domestic economy deteriorated, but at other times the domestic economy remained strong even when the terms of trade worsened. This paper explains this phenomenon by using a sign-restricted SVAR model, including with respect to global shocks such as global demand shocks, oil supply shocks and semiconductor supply shocks.

The results of an empirical analysis show that the terms of trade and the domestic economic growth rate move in different directions depending on the type of shock. In the event of a shock from increased global demand, the terms of trade worsened while the economic growth rate went up. In the case of a shock from decreased oil supply, on the other hand, both the terms of trade and the economic growth rate declined. When a shock from decreased semiconductor supply occurred, the terms of trade improved but the economic growth rate declined.

In overall consideration of the above, it is important to identify underlying factors first before analyzing how the domestic economy moves in line with changes in the terms of trade. Since the relationship between the terms of trade and domestic economic growth changes depending on the type of global shock, it would be inappropriate to conclude that a worsening of the terms of trade leads to a decline in the economic growth rate or that an improvement in the terms of trade causes the economic growth rate to rise.

The existing measures of labor productivity do not consider labor outsourcing, such as secondment and in-house contracting. This causes labor productivity to be biased when a firm heavily depends on labor outsourcing to produce its output. This paper estimates new labor productivity considering both directly hired and outsourced workers, and analyzes the impacts of labor outsourcing on labor productivity using the new measures.

According to the results of an analysis of manufacturing firms, the larger the firm, the higher the level of labor outsourcing, resulting in a more significant upward bias for labor productivity. The level of such upward bias is estimated to be around 3.9%-4.4% for small and medium-sized firms and 8.7%-11.2% for large firms.

The relation between labor outsourcing and labor productivity is found to vary depending upon the characteristics of the technologies adopted by firms. We cannot draw any conclusion about the impacts of labor outsourcing on the labor productivity of unskilled labor-driven manufacturing firms. Labor outsourcing, however, reduces labor productivity for high-skilled labor-driven manufacturing firms. On the other hand, for high-tech service firms that undergo rapid technological change and require labor with diverse expertise, labor outsourcing increases labor productivity.

These results imply that a firm should make labor outsourcing decisions after sufficiently considering its technological characteristics (unskilled/skilled and low-tech/high-tech), instead of simply following what leading companies are doing.

Korea‘s labor productivity growth has slowed since the global financial crisis. Much of this is due to the sharp decline in labor productivity gains in the manufacturing industry during the post-crisis period. The service industry, on the other hand, has experienced only a slight slowdown in labor productivity growth. Using the Korea Information Society Development Institute’s 2017 Productivity Account, this paper examines the trend of changes in labor productivity growth by industry during the pre- and post-crisis periods, as well as factors behind such changes.

Looking at manufacturing sectors by level of technology, sectors of all technology levels have seen their labor productivity grow at a slower pace since the global financial crisis. More specifically, sectors of high-level (semiconductors, displays, smartphones, etc.) and medium- to high-level (machinery, automobiles, ships, etc.) technologies, which consist mainly of key export industries, have seen a clear slowdown in labor productivity growth. Labor productivity in the services industry has seen slightly slower growth overall, with a small increase in the personal services, non-ICT producer services and public services sectors offset by a decrease in the distribution and ICT producer services sectors.

An analysis using growth accounting decomposition shows that the main driver of the slowdown in labor productivity growth in the manufacturing industry has been a slowdown in total factor productivity growth. On the other hand, the key factor for the services industry has been a slight slowdown in improvement in the capital equipment ratio. A structural decomposition analysis finds that a major factor behind the slowdown in total factor productivity growth in the manufacturing industry has been a sharp slowdown in growth in output per unit of input (labor and capital), despite some progress made in producing higher value-added products. Output per unit of input varies depending on production process innovation, the emergence of innovative businesses, and efficient allocation of labor and capital. In light of this, the analysis implies that there has been a lack of such innovation and of efficient resource allocation. The slowdown in total factor productivity growth in the manufacturing industry is seen in leading companies as well as those lagging behind, suggesting that this is an industry-wide phenomenon, not an issue of polarization between companies. Meanwhile, it is analyzed that restructuring across industries since the global financial crisis has not been effective in increasing total factor productivity.

In order to enhance manufacturing productivity, it is necessary to promote convergence of the manufacturing and services industries, discover leading core industries and support innovative startups. Regulations need to be eased and structural reform should be implemented to encourage efficient allocation of labor and capital, and restructuring of marginal companies should be continuously carried out. Efforts should be also made to produce higher value-added products that match those of advanced countries.

Despite the slowdown in current account transactions since the global financial crisis, the external positions of individual countries have steadily expanded, influenced for instance by the ultra-low interest rates and quantitative easing policies in major countries. This expansion in external transactions appears to have had significant impacts on the spillover mechanism of external shocks and on market volatility. However, there has been little systematic research on this subject. Taking this into account, this paper analyzes the impacts of changes in external positions on foreign exchange (FX) and stock market volatility using a panel smooth transition model based on country panel data.

It has been constantly pointed out that there has recently been a gap between business conditions, as indicated by GDP and other traditional macroeconomic variables, and the economic sentiment of households and firms. GDP growth, which is used as the main economic indicator, provides a good representation of changes in the average income level of the economy as a whole, but it fails to consider the specific situations of each economic agent. Meanwhile, economic sentiment as actually felt by individual agents is influenced not just by income level but by a number of factors such as income gaps and differences in business conditions among industries, and thus can differ somewhat from overall economic conditions. Against this backdrop, this paper estimates relative sentiment indexes using quantitative macroeconomic variables that reflect changes in relative gaps within the economy to better reflect economic sentiment. To identify the impacts of these macroeconomic variables on the subjective judgements of economic agents, this paper uses survey-based sentiment indicators, such as BSI and CSI, which contain subjective information about economic agents.

According to the results of the estimation, relative sentiment indexes were found to have generally shown movements similar to macroeconomic variables such as GDP growth up until the financial crisis period, but the gaps between those two types of indicators were found to have widened since 2014. GDP growth and other macroeconomic indicators have moved stably within relatively narrow ranges, while relative sentiment indexes have continued to fall. Such continued declines are analyzed to have been mainly due to the widening of generational gaps in the unemployment rate, and of gaps in the capacity utilization ratio between large corporations and small- and medium-sized enterprises (SMEs). This implies that decreases in relative sentiment indexes are attributable not only to cyclical factors, but also to various structural factors accumulated in the economy.

Therefore, ensuring the recovery of economic sentiment will require not only short-term counter-cyclical efforts, but also various policy efforts to narrow the relative gaps among economic agents. In other words, we should seek to narrow the gaps among participants in the labor market, among industries, and among corporations, through for instance improving youth employment conditions, achieving balanced growth between large companies and SMEs, and easing the production gaps among industries through forward-looking industrial restructuring.

Three aspects of Inflation Target for 2019 Onwards are particularly noteworthy. First, major components of the inflation target, such as the target itself, the way it is presented, and the target indicator, were kept unchanged, with the target set at the level of previous CPI (2.0 percent, year on year, point target). This is because the level and volatility of inflation in Korea have decreased and are now similar to those in advanced countries, and there was therefore no great need to change the target and other components. Second, the period during which the inflation target would be effective was not specified. The Bank had previously expected to change the inflation target every three years, but it now intends to keep the target unchanged unless there is a particular reason to adjust it. In this way, the Bank has enhanced the stability of the inflation targeting framework significantly. Finally, the Bank strengthened its communication with the public. The Bank decided to publish an inflation assessment twice a year, which includes price developments, future inflation forecasts and risks, and the monetary policy stance for achieving price stability. The Bank will provide explanations of this assessment to the public through various means, such as by holding Governor‘s press conferences. In addition to the Governor’s appearances before the National Assembly to answer questions, the Governor’s press conferences regarding monetary policy decisions, the release of the minutes of MPB meetings, and the publication of the Bank’s Monetary Policy Report, new communication channels have been introduced, and this has further strengthened the foundation on which the transparency and credibility of inflation targeting can be enhanced. Furthermore, the Bank will review the inflation targeting framework every two years and explain the review to the public, strengthening its institutional communication.

This paper examines the relationship between domestic and overseas long-term interest rates by carrying out an analysis of statistics on their correlation and principal components and on domestic-overseas interest rate differentials. According to the results of the analysis, Korea’s long-term interest rates have synchronized more with those of Germany and other advanced European countries than with those of the U.S. since the global financial crisis. Furthermore, an analysis with long-term interest rates divided into short-term interest rate expectations and term premia proves that such synchronization of interest rates has been attributable mostly to that of term premia.

The analysis points to the quantitative easing carried out by major central banks since the global financial crisis as a major cause of long-term interest rate synchronization. The results of the empirical analysis show that, as term premia in a given country declined greatly after the implementation of quantitative easing, those of Korea also decreased due to spillover effects, strengthening the synchronization of domestic and overseas term premia and long-term interests rates. The analysis results also show that global low growth and low inflation have strengthened the coupling of domestic and overseas economic conditions and inflation, contributing to long-term interest rate synchronization. Finally, improvement in Korea’s external soundness and consequent inflows of stable foreign investment funds from the public sector including governments and central banks into the Korean bond markets are seen to have caused the synchronization of Korea’s long-term interest rates mostly with those of advanced countries.

The fact that Korea’s long-term interest rates are synchronized more with those of European countries than with those of the U.S. should be interpreted as the long-term interest rates of Korea and European countries being similarly affected by changes in U.S. financial conditions, rather than as a weakened influence of such changes on the Korean financial markets. In addition, the synchronization of domestic and overseas long-term interest rates points to the need to pay more attention to the underlying trend of the long-term interest rates of advanced countries. It should be noted that if the ECB and other major country central banks commence full-scale normalization of their monetary policies, Korea’s long-term interest rates may rise, along with those of advanced countries, to a level higher than that of the present.

As the number of elderly households with housing assets increased rapidly between 2013 and 2017 due mainly to population aging, the share of these households in the total number of households with housing assets expanded. As for the middle-age and prime-age group, the number of households with housing assets increased, but the share decreased. Meanwhile, as for the youth, both the number and share of households with housing assets declined. Similarly, in terms of housing asset value, the share of the elderly with housing assets increased, while those of the youth and the middle-age and prime-age group decreased.

According to the results of an empirical analysis of households with housing assets, the wealth effects whereby higher housing prices lead to consumption growth are much smaller in the elderly group than in the middle-age and prime-age group. This seems to be based on the tendency that the elderly do not increase consumption in the face of potential gains from higher housing prices, but instead save in order to leave a bequest or to prepare for old age in line with longer life expectancies. Meanwhile, in the case of households without housing assets, higher housing prices are actually found to dampen consumption. The limiting effect on consumption is estimated to be greater in the youth and elderly groups, which have weaker income and employment conditions, than in the middle-age and prime-age group.

These analysis results indicate that the recent expansion in the share of the elderly in total housing assets could be working to limit the wealth effects of higher housing prices on consumption. Meanwhile, higher housing prices could have a negative wealth effect and drive down the consumption of households without housing assets in the youth and elderly groups in particular. These estimation results imply that changes in housing prices may not have great impacts on consumption. 

“shadow banking,” could act to destabilize the financial system, as the interconnectedness of nonbanks

with other financial institutions and the financial market has been strengthened amid the

possibility of accumulated systemic risk. In this regard, this paper examines the existing sectors of

non-bank financial intermediation and their risks, analyzes potential risks that may undermine

financial system stability, and presents implications.

Calculation of the volume of non-bank financial intermediation, following the criteria employed by

the FSB in its measure of shadow banking, shows that the broad measure of all non-bank financial

intermediation has continued to increase, while the narrow measure of shadow banking, focusing on

activities that are more likely to pose systemic risk, has exhibited slower growth. There is little

possibility of expanded risks thanks to prudential regulations on non-bank financial intermediation,

but some sectors such as collective investment and securitization vehicles have experienced higher

leverage and increased liquidity mismatches.

As a form of market-based finance, non-bank financial intermediation is closely linked to repo, bond,

and other financial markets, and in line with the increased issuance of bank debentures, risks may

spread further, for example through money and bond markets. Furthermore, according to the results

of a structural VAR analysis, money-market and bond-type funds can be temporarily affected by

interest rate fluctuations due to increased bond holdings and heightened volatility.

Systemic risk can accumulate in each sector of non-bank financial intermediation in terms of the

cross-sectional transmission of risks and shocks to other financial sectors via the interconnected

structure of the financial system. In this regard, this paper maps an interconnected structure in which

sectors of non-bank financial intermediation are connected through financial markets and

instruments, and conducts an input-output network analysis of the channels through which shocks

are transmitted within the financial system and their effects. Securities firms, trust companies and

collective investment vehicles exhibit strong interconnectedness within the financial system.

Securities firms transmit shocks rapidly to a great extent in both raising and managing funds,

whereas trust companies and collective investment vehicles affect other financial sectors greatly when

supplying funds. Notably, non-bank financial intermediation sectors are found to be heavily shocked

not only due to direct exposures to each other but also indirectly through two or more layers of the

interconnected structure.

As policy is normalized following the long period of post-crisis monetary accommodation, it is

necessary to pay attention to the possibility of financial system instability driven by the accumulation

of systemic risks that could be triggered by non-bank financial intermediation. In addition, close

monitoring is required of systemically important sectors of non-bank financial intermediation.

The Household Debt DB gives details on information related to the unique characteristics of individuals, such as age, address, credit rating, and income level; on financial transaction information, including records of loans and credit and check card usage; and on information on credit standing, such as loan and tax delinquencies and loan defaults. This DB allows us to make various micro-level analyses that could not be performed based on existing macro-data, since it includes individual-level information such as age, credit rating, income level and delinquency rate. Also, it allows analysis of debt structures, including debt type, repayment method and term structure, based on a wide range of credit information from an extensive sample exceeding 1 million persons.

Looking briefly into recent changes in the household loan structure in Korea using the Household Debt DB, we see that the share of mortgage loans has been on the rise, while the loan structure has been improving with the share of amortization mortgage loans increasing and their terms lengthening. Looking at the characteristics of household borrowers, we find that most loans are taken out by those in their 30s to 50s who are actively engaged in economic activities, and borrowing has increased particularly among those with high incomes and high credit ratings. Meanwhile, the delinquency rate of household loans has shown a low and stable trend.

The Household Debt DB is expected to be used more widely, since it has significant room for expansion by adding important variables and merging with other external data. 

Many indicators are being developed to help understand government fiscal policy. The indicators currently in use, however, were developed in an attempt to examine fiscal soundness and therefore shed little light on how fiscal policy affect economy. Even the indicators that reflect the effects of fiscal policy only do so partially and thus are of limited utility in assessing the overall impacts. This paper introduces and calculates a Fiscal Impact Measure (FIM) and analyzes its characteristics to suggest ways to comprehensively analyze the effects of fiscal policy on economy. The FIM considers the effects of tax revenue and fiscal expenditure simultaneously to enable users to comprehensively analyze the effects of fiscal policy on economic fluctuations. The FIM is also transparent, timely, and easy to calculate. Although it provides information qualitatively similar to that offered by fiscal accounts, the FIM is useful given that it also indicates the degree to which government fiscal policy affect the GDP growth rate.

After calculating the FIM using Korean data, it is found to reflect government fiscal policy well, accurately capturing changes in policies regarding tax revenue and fiscal expenditure. The FIM also points to the overall counter-cyclicality of the Korean government’s fiscal policy. Korea’s fiscal policy curbed aggregate demand overall during the economic expansion of the late 2000s, and helped expand aggregate demand during the economic slump following the global financial crisis. Since 2010 the Korean government has maintained an overall neutral fiscal stance, switching between slight tightening and easing.

The characteristics of the FIM should be taken into account when it is interpreted and used. The FIM is an indicator that helps users understand how the government’s fiscal activities affect growth and thereby ease economic fluctuations, and it is not intended for an overall evaluation of the government’s role. Another limitation is the FIM’s uncertainty as an indicator in that it is calculated using estimates such as revenue and expenditure multipliers.

Exports have shown rapid growth and led domestic economic growth,
but their spillover effects on facilities investment and employment have
exhibited a slowing trend. Given that the weakening spillover effects of
exports on domestic demand were a result of the rearrangement of
Korea’s key export industries while they coped with changes in domestic
and external economic conditions, the following policy measures are
required: first, measures to strengthen the linkages between large and
small & medium-sized export firms and to localize imported facilities
through technical development are required to enhance indirect spillover
effects of exports. Furthermore, in addition to policy measures to facilitate
exports’ job creation inducement, efforts should also be made to create
more jobs at domestic demand-oriented firms for example by encouraging
SMEs to participate more in exports, and by discovering new growth
industries.

This paper focuses on the heterogeneity in and the increase of the
frequency of price adjustments of firms and analyzes their impacts on the
effectiveness of monetary policy.
According to the analysis results, when the frequency of price
adjustments differs from firm to firm (rather than being the same for all
firms), monetary policy are found to have greater impacts on the real
sector (the output gap), while having reduced impacts on inflation. When th
e frequency of price adjustments increases, the effects of monetary policy
are analyzed to differ depending upon whether the frequency of price
adjustments is the same or different across firms.

In the household utility function, habit formation in consumption
reflects how previous consumption affects household utility. In other
words, habit formation is a parameter connecting household utility to
previous consumption in the household utility function, and is closely
related with the persistence of consumption. Empirically, habit formation
in consumption can be estimated by using time series to calculate the
sum of autoregressive coefficients of the consumption growth rate. With
other factors remaining unchanged, weaker habit formation in
consumption (i.e. a smaller impact of previous consumption) is associated
with greater fluctuations of the consumption growth rate as well as a
lower average rate. A similar pattern has been witnessed since the crisis.
The estimate of Korea’s habit formation in consumption generally
exceeded 0.5 from 2001 to 2007, but the figure declined to below zero
after the crisis, from 2010 to 2016. This decline in the estimate seems to
have resulted from the weakened relationship between income and
consumption, and also from the increased debt burden following the
buildup of household debt since the crisis.

Next, this paper uses a small open economy DSGE model to examine
changes in impulse responses to a weakening of habit formation. In the
event of internal or external shocks, the responses of the consumption
and GDP growth rates are greater in the initial stage, and the subsequent
disappearing of such responses is faster, in economies with weak habit
formation than in those with strong habit formation. This suggests that a
series of various shocks may lead to huge economic fluctuations in
economies with weak habit formation.

Overall, unexpected economic shocks may cause rapid changes in
economic variables in a situation like the recent period when there is weak
habit formation and the economy shows a modest recovery. It is therefore
all the more important to monitor internal and external shocks, and work
to stabilize the economy when economic shocks are expected to have
excessive spillover effects. Furthermore, in order to strengthen the domestic
demand base through consumption, it will be necessary to not only
increase income but also promote its stability and gradually reduce the
household debt burden.

An accurate understanding of the causes of the recent rise in the savings ratio is very
important in forecasting the Korean economy, including future domestic demand. This
paper first looks into major macroeconomic variables, such as household income, taxation
and social contributions, the demographic structure, and real interest rates, that affect the
savings ratio. These variables, however, do not seem to properly explain the recent pattern,
as they are generally acting to lower the savings ratio.
Accordingly, this paper focuses on understanding how the savings ratio is impacted by
the housing market, which has recently led the Korean economy. First, the housing market
in Korea has the following characteristics with respect to the savings ratio:
① The rate of increase in housing construction investment and the housing savings ratio
generally coincide with each other.
② Since 2012, the increase in the savings ratio (decline in propensity to consume) has
been pronounced among those in their 30s and those in their 60s and older. These two
age groups also show the highest growth rates in real assets and liabilities.
In reflection of these characteristics, this paper sets a general equilibrium model in
consideration of housing market preferences and carries out a simulation. The results show
that a housing market preference shock has caused housing investment and the savings
ratio to rise simultaneously through a constraint on household budgets. In addition, the
results of the estimation on the relationship between the housing savings ratio and real
investment （home purchases) though various variables and patterns also confirm a
significant relationship between the two variables. In other words, recent heightened
residential building construction investment is judged to have induced an increase in
liabilities and to have caused a rise in the housing savings ratio.
This empirical relationship points to a need for policies to keep housing prices stable
over the medium to long term and reduce the housing purchase burden in order to boost
private consumption, which has grown more slowly than GDP.

This paper examines how the money supply mechanism and the effectiveness of monetary indicators have changed since Korea’s monetary policy framework shifted to focus on interest rates rather than monetary aggregate. To this end, this paper examines the causality between bank loans and M2 according to the “financing through money creation (FMC)” approach, analyzes the volatility of size of bank loan, and conducts a VAR model analysis of the relationship between banks’ lending attitudes and loan supply. This paper then verifies whether monetary indicators affect GDP and inflation by estimating the income and inflation equations.

First of all, the examination of the exogeneity and endogeneity of the money supply indicates that it has shown weaker exogeneity or has become endogenous since the focus of Korea’s monetary policy framework moved from monetary aggregate to interest rates. For the period in which the focus was on monetary aggregate (hereinafter the “monetary growth-targeting period”), causality was found from monetary base growth to bank lending growth, and also from M2 growth to bank lending growth. For the period in which the focus was on interest rates (hereinafter the “interest rate-targeting period”), however, causality was found from bank lending growth to M2 growth. During this interest rate-targeting period, the volatility of size of bank loan was also higher than during the monetary growth-targeting period, and banks’ lending attitudes had statistically significant effects on loan supply, implying the possibility of an endogenous money supply.

Furthermore, the effectiveness of monetary indicators proves to have weakened during the interest rate-targeting period. During the monetary growth-targeting period, money growth exhibited explanatory power for inflation but not for real GDP growth, while during the interest rate-targeting period, money growth indicated explanatory power for neither real GDP growth nor inflation. 

This paper is significant in that it examines the money supply mechanism, on which there has not been a great deal of research since the focus of the monetary framework shifted to interest rates, to see whether money supply is endogenous, based for example on the FMC approach. Furthermore, considering the endogeneity of the money supply as well as the fact that the effectiveness of monetary indicators is weakening, this paper may suggest that research on topics such as an analysis model with the endogeneity of the money supply taken into consideration will be necessary in analyzing the spillover effects of monetary policy.

First, households are now categorized into those who have access to the financial market and those who do not, and the fiscal sector has been strengthened, such as by including government transfer expenditures. Second, the world economy is modeled by a DSGE structure instead of the three-variable VAR model to enhance the theoretical coherence and data explanatory power of the model. Third, the world trade growth variable has been included as the determinant of Korean exports, thus allowing more accurate identification of factors causing changes and greater accuracy of export forecasts. Fourth, oil has been incorporated into the model to assess the impacts of oil price changes, thus allowing forecasts related to them. Fifth, trends on the expenditure side such as consumption and investment, have been reflected in the model. Finally, changes of trends in growth and inflation are reflected indirectly in the model in order to reduce the occurrence of structural forecasting errors.

These improvements in the BOKDSGE model are expected to further improve the accuracy and reliability of economic outlooks going forward.

 The macro-level analyses reveal that actual inflation and inflation perceptions, i.e., the perceived level of past inflation by consumers, mainly influence inflation expectations in Korea, which implies that inflation expectations are formed in a backward-looking way. In particular, considering the fact  expectations and perceptions of inflation are nearly the same, it can be inferred that subjective perceptions of actual inflation exert stronger influence on inflation expectations compared to actual inflation information. Moreover, inflation expectations are formed depending heavily on the price information about a narrow set of consumer goods that are frequently purchased or whose expenditure shares are higher. Turning to macroeconomic indicators, whereas price  information, such as the Consumer Price Index and wages, is estimated to be utilized in forming inflation expectations, information on economic and financial conditions, including industrial production and interest rates, is not. In the advanced economies such as the United States, the euro area, the UK, and Japan, inflation expectations are formed similarly but in a more forward-looking way than in Korea.
 
 In the micro-level analyses, it turns out that the expected level of inflation varies depending on the Consumer Survey respondents’ individual characteristics,  including age, sex, income, and economic sentiments. However, there exists a crucial distinction between Korea and the advanced economies: in Korea, the inflation expectations of respondents who are younger or earn larger income  exceed those of respondents who are older or earn less. Turning to economic sentiments, a respondent having a pessimistic economic outlook tends to form inflation expectations at a higher level relative to an optimistic one, which suggests the possibility that the discrepancy between inflation expectations and actual inflation could regularly widen in a low inflation environment induced by economic slowdown as the number of pessimistic respondents grows.

 The main finding of this paper that inflation expectations in Korea are formed in a backward-looking way while depending mainly on a confined range of information implies that the most effective measure for anchoring inflation expectations is to stabilize actual inflation. Additionally, communicating to the public a firm intention to pursue price stability alongside the monetary policy stance can contribute to anchoring inflation expectations to some extent.

  BOK-COIN is defined as GDP growth excluding non-cyclical fluctuations and short-term fluctuations with cycles of less than one year, and is computed by the following two steps; The first is to estimate common factors under two different frequencies: mid-to-long run and short run. The common factors represent co-movements of a wide range of real economic and financial variables, and are estimated using generalized dynamic factor analysis. We treat non-cyclical fluctuation as the GDP growth that is unrelated to these factors. BOK-COIN is then computed by projecting GDP growth on the factors  and extracting the components that belong to the mid-to-long run factors. Our method is similar to that of EURO-COIN, but differs in that we avoid using band pass filters to thus allow users to include recent data in the second step. As a result, BOK-COIN is able to respond more flexibly to sharp changes in economic conditions.    

Our results show that BOK-COIN properly reflects the underlying movements of GDP growth in Korea, and maintains consistency, unlike other real-time indicators that are usually subject to later revisions. In addition, it is analyzed that BOK-COIN is more closely linked with monetary policy than is GDP growth, and effectively tracks turning points in the business cycle. 

   BOK-COIN has been showing an upward trend since the second quarter of 2016, indicating continuation in the trend of recovery in the Korean economy. Considering the negative non-cyclical factors of the latter half of last year, such as Brexit, political uncertainties, and the conflict with China associated with Korea’s deployment of THAAD, GDP growth reflecting cyclical factors only appears to have been higher than actual growth in 2016, and it is expected that growth in 2017 has exceeded that in 2016. However, since the trend of recovery seems less strong than in the past, it is necessary to keep a close watch as to confirm whether the current economic recovery is robust and stable.

    This paper assesses this phenomenon as being attributable to a disturbance of household labor supply-side effects. Labor market indicators are affected by labor demand, which is represented by business activities, and also by changes in households’ labor supply behaviour. For instance, if negative effects such as worsening household income conditions work to strengthen the tendency of people of retirement age to remain in the labor market, employment may increase rather than decrease even when the economy is deteriorating.

    In this regard, in assessing labor market conditions it is necessary to consider not only labor demand factors such as business activities, but also factors affecting household labor supply. The recent dramatic demographic changes and polarization of the labor market might imply that household labor supply conditions have also changed greatly. If these changes in household labor supply conditions overwhelm labor demand-side factors, the effectiveness of labor market indicators as economic barometers may be limited.

    With this problem in mind, this paper uses the methodology of Barnichon and Mesters (2016) to classify labor market indicators into labor supply and labor demand indexes. After compiling statistics on labor mobility by gender and by age group, this paper divides it into labor mobility caused for example by demographic changes (labor supply factors), and labor mobility resulting from general factors irrespective of gender and age (labor demand factors), to estimate its labor supply and demand indexes. This paper also calculates the unemployment rate with labor supply factors adjusted (LSFA), to examine its relationship with economic activities.

    According to the results of estimation using Statistics Korea’s monthly surveys on the economically active population from January 2000 to July 2017, labor supply has increased in almost all age groups except for the middle-aged male group, while labor demand has exhibited slower growth. Calculation of the unemployment rate with labor supply factors adjusted to reflect labor demand factors only (LSFA unemployment rate) shows this rate to have a strong correlation with economic activities, unlike the headline unemployment rate. Furthermore, the LSFA unemployment rate has been higher than the headline unemployment rate, and the difference between them has been widening recently. This gap seems attributable to demographic factors, including a fall in the proportion of the younger age group, in which there is more labor slack, and an increase in the economic participation rate of people of retirement age due to their delaying of retirements. It also seems to have stemmed from the contribution to labor supply from the rise in the potentially economically active population, including young applicants, rather than to growth in the number of unemployed. 

First, Korea’s macroeconomic indicators signify that the country’s overall economic vitality has steadily weakened, with its growth decelerating, growth gap vis-à-vis advanced economies narrowing, growth potential lowered, productivity growth slowing, and population aging. Second, firm dynamics in Korea reveal that there have been delays in the exit of inefficient firms, declines in the entry of new firms and in the number of jobs newly created as a consequence, and a decrease in the likelihood of scale-up of small- and medium-sized enterprises due to a falling mobility across firm sizes. Third, Korea’s industry dynamism appears to have declined, as the speed of change in industrial structure has slowed down, the productivity gap among industries has widened, and the country’s export has heavily resorted to only a few products with little changes to the product mix. Fourth, Korea’s innovative capacity too appears to have deteriorated, as manifested by the poor R&D efficiency and an increasing dependence on the import of technology from advanced economies due to the lack of technological innovation. Lastly, in an attempt to make an overall assessment, the above-mentioned features are collectively used in developing an economic dynamism index, showing a secular decline in Korea’s economic dynamism for the past fifteen years.

To revive the dynamism of the Korean economy, it is essential above all to strengthen economic fundamentals through structural reforms and to create an environment conducive to incessant creative destruction and innovation so as for entrepreneurship to manifest itself. Specifically, regulatory reforms should be carried out to ease such regulations that unduly limit competition and discourage innovative entrepreneurs from starting a new business; and an environment conducive to promoting fair competition needs to be created by improving corporate governance and prohibiting unfair business practices for instance. Also, a complete overhaul of corporate restructuring system is necessary to facilitate non-viable zombie firms to exit the market in a timely fashion so as to promote a more efficient allocation of scarce resources. These efforts then could contribute to creating more jobs as well.

  According to the analysis results, in the case of China, an increase in its price competitiveness led an increase in its market share at the initial stage of its market entry, but the influence of non-price factors, including quality, is found to have increased gradually. In addition, the impacts of the exchange rate on China’s market share are analyzed to have weakened gradually since the mid-2000s. Declines in the market shares of advanced economies (AEs), including the US and Japan, are analyzed to be mainly attributable to a narrowing gap between AEs and EMEs in terms of product quality. Korea’s market share has also expanded steadily, thanks to economic growth in China and other Asian EMEs with high weights of external trade. However, since Korea is heavily dependent upon imported intermediate goods, the trend of growth in its market share based on added value is found to be constrained.

  The analysis results of this paper imply that it is necessary to enhance export competitiveness over the long term, such as through quality improvements, enhanced cooperation with major trading partners, and diversification of the export structure.

  This continued decline in the potential growth rate seems to have resulted from the weakening of total factor productivity and a slowdown in capital accumulation. The diminished total factor productivity appears to be related closely to the weakened productivity of the Korean economy, due for example to the insufficient development of service industries and high level of regulations. Sluggish investment resulting from economic maturation and heightened uncertainties seems to have acted as a major factor behind the slowdown in

capital accumulation. Going forward, rapid population aging and a decline in the working-age population will likely increase downward labor-side pressures on the potential growth rate.

  In order to expand growth potential in a situation where growth led by inputs such as labor and capital is limited, it is most important to strengthen economic fundamentals through social and economic structural reforms, in addition to implementing macroeconomic policy aiming at ensuring economic momentum. To

this end, efforts need to be maintained to enhance the productivity of the Korean economy, through industrial restructuring, reforms in the labor, goods and services markets, and technological innovation. In addition, comprehensive measures in response to demographic changes such as the low birth rate and population aging need to be developed and implemented more actively from medium- to long-term perspectives, while institutional arrangements should also be developed to ease sectoral imbalances.

  Against this backdrop, this paper looks into the characteristics of recent economic volatility in Korea, which include not only the usual macro volatility, but also micro volatilities, which reflect corporate dynamics. This paper then makes an in-depth analysis of the causes of the reduction in economic volatility, using both qualitative and quantitative methods, in terms of shocks and their effects.

  The main results of the analysis are as follows: First, the reduction in economic volatility in Korea is more marked than those in major countries and is concentrated in household consumption and corporate investment in terms of GDP expenditure sectors. In addition, in terms of the stage of the economic cycle, the reduction is more noticeable in the expansionary phase than in the contraction phase. Second, volatilities in micro indicators have decreased simultaneously with those of macro indicators, which is contrary to what was seen in major countries such as the US and the UK during the period of the Great Moderation. Third, the reduced economic volatility is estimated to be attributable to reduced positive shocks in global economic activity and productivity, and to weaker responses to them from economic agents such as households and corporations.

  Considering these analysis results, the recent reduction in economic volatility in Korea is not expected to have the positive effects seen during the period of the Great Moderation. During that period, with innovation activity being brisk and tendencies to spend and invest. Meanwhile, in Korea, with innovation activity

slowing, economic agents show more conservative behaviors. This is because the recent reduction in economic volatility is largely attributable to lessened overall vitality, rather than to economic maturity.

  In a situation where there is no noticeable economic volatility, as seen recently, there is a greater possibility of error in identifying the stage of the economic cycle, and thus caution should be exercised in doing so. When private consumption is sluggish and economic volatility is driven by exports, whose cycle is short, economic activity may end up in a minor cycle. Therefore, it is desirable to focus more on developments related to domestic demand and track economic movements over a medium-term horizon. In addition, it is essential to heighten the accuracy of economic analysis through close monitoring of the nature, magnitude and origin of shocks at home and abroad and through analyses of changes in the behaviors

of economic agents.

  Furthermore, to strengthen recovery momentum in the Korean economy, more focus should be put on policy efforts to improve productivity by expanding the stable income base for households through job creation, and by augmenting the innovation capacities of corporations.

  According to the results of the analysis, industries with higher levels of GVC participation show higher labor productivity or total factor productivity. The more fragmented a value chain is, the greater such improvement in labor productivity led by GVC participation is estimated to be.

Meanwhile, the results of the analysis of Korean industries show that productivity shocks by industries located up the value chain have significant impacts on the added value of downstream industries. Productivity shocks by downstream industries, on the contrary, are not estimated to have significant impacts on upstream industries. The analysis also shows that shocks from upstream industries in Korea have greater impacts on Korean industries than shocks from upstream industries overseas.

  This study implies that it is necessary for individual industries to enhance their GVC participation to achieve greater productivity. Particularly, it is important to encourage upstream industries occupying the first part of the production stages to participate in GVCs, so as to increase externalities from the spread of productivity.

However, Korea’s pace of aging is faster than that of other members, as its total fertility rate is the lowest among the members while its life expectancy exceeds the OECD average. Using panel data from OECD members, this paper divides the common causes of population aging in the OECD into declining birth rates and increasing life expectancy, and then analyzes the causes of aging in terms of factors determining declines in birth rates. According to the results of the analysis, declines in birth rates are attributable mainly to socio-economic factors, including wedding and childcare expenses and labor market conditions limiting division of housework, and to socio-cultural factors such as changes in education levels and gender-equality values. Increasing life expectancy is found to have a positive correlation with welfare policies and income levels. This paper also compares the characteristics of aging in Korea with those in major countries, in technical terms. As Korea industrialized rapidly, so has population aging progressed very fast. Factors behind this fast pace of aging include historical characteristics, such as declining potential fertility resulting in part from birth control policy, sociocultural characteristics, such as declining birth rates due to high wedding and childcare expenses, an environment in which it is difficult to achieve work-family balance, and unequal gender division of housework, and demographic characteristics, such as a surge in the share of elderly people as baby boomers age. To cope with this, family welfare policies are urgently needed to help ease the burdens of wedding and childcare expenses, for example by stabilizing the housing market and reducing private education expenses, and create working conditions that ensure work-family balance and equal gender division of housework. More fundamentally, it is necessary to form a social consensus on the need for a gender-equal society and develop legal and institutional frameworks to make such a society a reality. It is also necessary to seek comprehensive measures to address poverty among the elderly due to the fast pace of aging and to support the post-retirement pension and welfare systems.

The Bank of Korea short-term forecasting system estimates economic growth rates for the current and following quarters by calculating the weighted average of the forecasts using models with great forecasting performances among the forecasting model groups. For this research, a machine learning model and MIDAS model, which are known to enhance economic forecasting performances, have been added to the existing forecasting system, which has been constructed using mainly a linked model. A linked model estimates economic growth forecasts by converting various monthly information variables into quarterly ones. A machine learning model is a type of non-linear regression model that uses a self-learning process to constantly improve predictive power whenever data are added. The MIDAS model uses monthly data as direct explanatory variables for quarterly growth forecasts, without converting monthly data into quarterly figures. Therefore, in this model, the predictive power for the forecasts is improved by ruling out the prediction errors that occur in the course of estimating missing values to convert data from monthly to quarterly values.

According to the results of the forecasting performance on the expanded short-term forecasting system, the added machine learning and MIDAS models are found to improve the predictive power of the forecasting system. Looking into the predictive power for each model, none of the three models shows better performances, but the MIDAS model shows relatively good results for the forecast for the current quarter, and the machine learning model shows better results for the forecast for the following quarter. The forecast calculated by combining various models based on performance results generally succeeds in capturing actual economic growth movements.

The expansion in the forecasting system is expected to reduce the dependence on specific forecasting techniques and systemic prediction errors, since this allows us to operate the economic growth forecasting system based on multiple models. Going forward, it is necessary to accumulate know-how on forecasting techniques in the course of actual operation of the expanded system, and to constantly improve it in reflection of recent research results from the academic circle.

A decomposition of the changes in OECD countries' TFPs through a stochastic frontier model shows that Korea's TFP declined by an annual average of 2.0 percentage points after the crisis, and this is estimated to have been attributable to a 0.6 percentage point decrease in efficiency factors and to a 1.4 percentage point decrease in technical advance factors. This paper compares these estimates with those of OECD countries, divided into two groups depending on per capita income. The technical advance factors of these groups declined by an annual average of 1.5 and 1.4 percentage points each, both showing similar movements to those of Korea, although in Korea the technical advance factors declined faster than efficiency factors. Efficiency factors, meanwhile, decreased faster in Korea than in the two OECD groups, suggesting that weakening efficiency is one of the major factors causing a slowdown in Korea's TFP.

Next, this paper analyzes factors causing differences in efficiency among OECD countries. The results show that such differences are related closely with market regulations and the protection of intellectual property rights. As for market regulations, in particular, the degree of regulation complexity and also of the protection of vested corporate interests seem to have statistically significant effects on such international differences. While the level of Korea's market regulations have significantly improved from the past, it remains higher than those of OECD countries, and the environment for intellectual property right protection remains unfavorable. Going forward, in order to enhance Korea's productivity, it is necessary to ease market regulations and improve the environment for intellectual property right protection.

To this end, this paper uses the yield spreads between Korea and the US to derive a curve similar in concept to an individual country's yield curve, using the differences in interest rates between Korea and the US by maturity, and estimates the level, slope and curvature of the curve at each time based on the data of the observed differences. According to existing literature, the level of the yield curve reflects inflation expectations and the potential growth rate, while the slope reflects the short-term output gap, and the curvature reflects market expectations on economic variables including the linkages between short- and long-term interest rates.

Using the level, slope, and curvature of the derived Korean-US yield spread curve as explanatory variables to estimate exchange rate expectations in the market (the difference between forward exchange rate and spot exchange rate), the results show that the level and slope of the curve influence exchange rate expectations in a positive direction for all maturities ranging from three months to five years, and the curvature variable significantly affects expectations when maturities are one year or longer. This shows that, if policy rate hikes by the US Federal Reserve narrow the yield spreads between Korea and the US, the forward dollar-won exchange rate compared to the spot exchange rate declines.

These results imply that changes in the international financial market landscape, such as from major advanced countries' post-crisis quantitative easing policies and the recent monetary policy normalization, not only directly affect the dollar-won exchange rate, but also change the interest rate structures of various maturities, and thus have a significant impact on exchange rate expectations. With major advanced countries expected to normalize their interest rates, short- and long-term interest rates have recently been showing different movements in the international financial markets. This paper is meaningful in that it gives a framework to analyze the impacts of not only changes in the gap between short-term interest rates in Korea and the US, but also changes in the structure of short- and long-term interest rates on exchange rate fluctuations.

1955 and 1963), who account for 19.2 percent of the working-age population,

there are concerns that this may have negative impacts on the housing market. In

this regard, this paper analyzes the housing consumption behavior of each

generation, particularly in terms of housing tenure choice and living space, using

basic statistical data from the Survey of Household Finances and Living Conditions

for 2012 through 2016.

Looking at the housing consumption behavior of baby boomers, contrary to

general expectations, they do not sell their houses or reduce their living spaces

around the time of retirement. Our panel model, designed to control for other

factors that affect housing consumption behavior, such as the number of

household members and income, also shows that the baby boomers' housing

consumption behavior has not changed much. According to the results, as the

baby boomers get older, they are more likely to be owner-occupiers living in

larger spaces, and their housing consumption behavior is not affected much by

factors such as the number of household members and income. However, the

older group, those aged 65 or more, shows totally different housing

consumption behavior from that of baby boomers. Members of the older

generation are less likely to be owner-occupiers and tend to live in smaller

spaces as they get older.

This paper conducts a simulation to estimate how this difference in housing

consumption behavior between baby boomers and the older generation will affect

housing consumption behavior of entire households in the future. It is estimated 

that housing tenure choices will not change much ─ while baby boomers joining

the older generation will work as a factor dragging down their housing

consumption, it will be offset by consumption by the younger generation. Living

spaces, however, are estimated to gradually decrease.

Considering these analysis results, future housing supply policy should focus on

small- and medium-sized housing units, in reflection of changes in housing demand

following demographic changes, and efforts need to be made to ensure income

stability for the older generation, for example by facilitating reserve mortgage

loans.

uncertainties, making overall use of the available information on domestic and

overseas financial and real economic conditions. It also proposes a monthly growth

fan chart preparation technique to ensure swift identification of changes in

forecast risks and uncertainties in line with changing economic conditions based on

this information.

  The paper first calculates economic condition indicators in four areas, domestic

financial and real conditions, and overseas financial and real conditions, using 112

monthly indicators. It then estimates the impacts of specific indicators on the

variance, asymmetry, and kurtosis of the growth probability distribution through a

multiple quantile regression analysis. Finally, it prepares a fan chart by building a

probability density function that reflects the quantile regression estimation results,

using an asymmetric power distribution.

  Korea's economic growth forecast risks and uncertainties measured through the

fan chart are found to differ greatly, depending upon economic conditions.

Especially since 2013, the probability of the growth running below the conditional

expected value subject to the Bayesian FAVAR model has been higher than 50%,

which shows that the possibility of the economy being more sluggish than

expected has continued to be high.

  The analysis on the influence of specific indicators on the fan chart reveals

that improvements in domestic real conditions increase the possibility of rapid

economic growth by moving the fan chart upward, and improvements in domestic

financial conditions have greater effects of reducing uncertainties by, for instance,

reducing the width of the fan chart. Meanwhile, changes in overseas conditions

are analyzed to have limited impacts, unless they are accompanied by changes in

domestic financial and real conditions. Using the methods of this paper to calculate

changes in the fan chart from October 2016 to December reveals that downside

risks to the economic growth forecast increased as domestic real conditions

deteriorated, although overseas conditions improved somewhat.

The monthly fan chart presented in this paper is expected to provide the

prompt information needed to assess economic developments, adjust the forecast

path, and make monetary policy decisions. To improve its accuracy, it is necessary

to continuously check if specific indicators are adequately reflecting economic

conditions, and to keep looking into the possibility of using additional information

variables.

  This paper suggests how to calculate the rates of transition of employment statuses by using a few constraint formulas regarding employment status transitions, and evaluates current labor market conditions through calculations of relevant data. Korea’s employment conditions have been worsening while going through a period of jobless growth in the mid-2000s, a period of growthless jobs in the early 2010s and a recent delay in growth. With the sharp drop since 2015 in the number of persons newly employed, the vitality of the labor market has been deteriorating rapidly. In particular, the trend of improvement in employment conditions for women and older people is slowing down, and employment conditions for young people are also worsening due to the rapidly decreasing job-finding rate. In addition, as labor mobility among different employment statuses is decreasing, the labor market’s adaptability to domestic and external shocks is also weakening. Meanwhile, given that changes in the unemployment rate are being increasingly affected by the job-finding rate, the unemployment rate is likely to decline even further if the job-finding rate falls due to factors such as full-scale corporate restructuring and widening labor market mismatches.

  According to the results of the analysis conducted through the model, a substantial part of the oil price fluctuations since 2000 are explained by speculative and precautionary demand shocks over short- and medium-term horizons, and industrial demand shocks and crude oil supply shocks are found to have contributed to the underlying fluctuations of oil prices. In addition, while the declines in oil prices since the financial crisis until recently are substantially explained by the fall in speculative and precautionary demand for crude oil, industrial demand shocks explain an increasing part of the declines in oil prices due to the decrease in crude oil demand in line with the global economic slump. Moreover, oil price declines resulting from oil supply shocks and speculative and precautionary demand shocks are found to have had positive impacts on Korean economic activities, while oil price declines due to industrial demand shocks, combined with export declines in line with overseas economic recessions at the early stage of these shocks, are found to have had somewhat negative impacts on the Korean economy.

   Taking these results into consideration, in conducting policy analyses it is necessary to identify the various shocks causing oil price fluctuations, examine their spillover effects, and seek appropriate policy measures, rather than considering oil prices simply as an exogenous variable. In particular, future analyses of the effects of oil price fluctuations should fully consider the fact that financial factors have stronger influence in the crude oil markets amid the current ample global liquidity, and also the fact that industrial demand-side factors have growing influence in accordance with weak global demand.

  For the past five years, aggregate consumption growth for people aged 60 or older (based on the household head's age), stood at an annual average of 7.1%, far exceeding 2.3% for young and middle-aged populations. This increase in consumption by the elderly is attributable to a rise in the employment rate and an increase in the number of public pension recipients. However, the increase in precautionary savings in line with longer life expectancies, low interest rates and the weakening of the wealth effect, as well as the insufficient securitization of assets held by the elderly have worked as factors limiting consumption.

  Consumption by the elderly is likely to continue to show a high growth trend going forward. Annual aggregate consumption growth by the elderly is expected to average around the mid-8% range during 2016~20. With growth in the number of households headed by the elderly gathering pace due to the baby boomer generation joining the elderly population, income per household will maintain a relatively high growth trend, boosted by increased economic activities and a larger number of private pension recipients. In addition, the trend of decline in the propensity to consume, which has constrained consumption so far, is likely to moderate gradually, thanks to growth in pension incomes and a slower increase in life expectancies. Accordingly, the share of consumption by the elderly in total consumption is expected to rise from 18.8% in 2015 to around 24% in 2020, with their contribution to consumption growth increasing from 38.5% during 2011~2015 to the 60% range during 2016~2020.

  In response to these trends, overall conditions should be improved to establish the elderly as the center of the national economy. It is necessary to expand job training and placement services for the elderly and to promote more active use of reverse mortgage loans to allow the elderly to make up for their weak income security. In addition, concerns about the receipt of pensions should be addressed by strengthening the mid- to long-term financial soundness and transparency of various pensions for old age, including the National Pension and private pensions. In addition, infrastructure that supports the various consumption activities of the elderly should be expanded, through for instance the development of elderly-friendly industries.

  From this perspective, this study uses a VAR model to empirically examine how the unorthodox monetary policies of the four major central banks, including the US Fed, have affected domestic inflation from 2009 to 2014. An analysis of these central banks' securities holdings and long-term interest rates (yields on 10-year Treasuries), using exogenous variables reflecting the unorthodox monetary policies, shows that these policies have somewhat contributed to lowering domestic inflation further through the exchange rate channel. Quantitative easing and other unorthodox monetary policies by the US Fed, in particular, are estimated to have affected domestic inflation more significantly than the policies of other central banks.

  These results suggest the great need for systemic studies on how various external factors, such as changes in the major countries' policy stances, affect domestic inflation, which could then serve as the basis to strengthen communication regarding monetary policy. If a small open economy like Korea fails to accurately recognize and understand that domestic inflation has been amplified by external factors, economic agents may view domestic economic situations in an excessively negative light, which could lead to risks of unnecessary economic fluctuation.

  First, by calculating the degree of FX market development by nation, using the financial development measurement methodology by Svirydzenka (2016), this paper finds a marked difference in the degree of FX market development between advanced economies (AEs) and emerging market economies (EMEs). This difference seems mainly attributable to the depth of the FX market, as measured by the size of daily average FX transactions, rather than FX market access. This implies that, although FX markets in EMEs have made great progress in terms of economic openness, they have still failed to make great qualitative improvements in terms of market size, the degree of interlinkages with other markets, and other such aspects. The analysis shows that in Korea's case as well, although its FX market has developed rapidly and has recently reached the level of AEs, the depth of its FX market still has much room for improvement.             

  In addition, an empirical analysis of 48 major countries, using FX development indices calculated with annual data from 1995 to 2014, finds that the development of the FX market is confirmed to have a non-linear relationship with financial stability and economic growth. In other words, this analysis finds that the development of the FX market positively influences financial stability and economic growth up to a certain point, but negatively impacts these factors with further developmental increases. Therefore, if FX market development goes beyond this threshold, to prevent further development from increasing negative impacts on financial stability and economic growth, it seems necessary to come up with several supplementary policy measures for the FX market, including macroprudential regulations. 

   According to the results of the analysis, news shocks falling short of or exceeding market expectations affect volatility and extreme price fluctuations (jumps) in the bond markets more significantly than those in the stock markets. Meanwhile, news shocks and estimated standard deviations of individual indicators have different influence on the financial markets depending on the economic phase and the degree of financial instability, which confirms that these external variables are necessary in analyzing financial market responses.

   In light of this, understanding expert expectations of certain indicators in advance will help in predicting and responding to market responses when these indicators are released. However, as such responses can vary depending on the economic phase and the degree of financial instability, these external variables should be closely monitored. Meanwhile, Base Rate announcements have increased bond market volatility significantly when news shocks exceed expectations or estimated standard deviations are large amid high financial market instability. Given that the Base Rate is the indicator to which market participants are most sensitive, when the financial markets are highly unstable, communications can be made to adjust market participants' expectations and thus reduce bond market volatility upon a Base Rate announcement.

  According to the analysis results, mobile payment services are found to be more actively used by the lower-age group, the higher-educated group and by females than males. However, among all social demographic variables, consumers' income is not found to have had a conspicuous impact on their choice of mobile payment services. Meanwhile, residents in big cities are found to have used mobile payment services more frequently and this tendency has been more apparent for offline commerce payments, but has not been found for online commerce payments or for mobile banking. 

  These analysis results should be useful for establishing payment and settlement policy that supports the widespread use of mobile payment services and promotes the FinTech industry. First, for widespread use of mobile payment services, there is a great need to narrow the gap among classes in the use of such services. Particularly since education and age, rather than income, are analyzed to be major factors restraining the widespread use of these services, it is important to devote efforts to make these services easier to use, while strengthening their safety and reliability. In addition, there is a need to support the use of mobile payment means in stores mainly used by the elderly and in smaller cities.

  One limitation of this study is that it has only indirectly confirmed the effect of accessibility to service member stores when consumers choose their payment means, by basing the analysis on whether they reside in big cities or not. Accordingly, to make a more accurate analysis, additional research should be done concerning stores' status in accepting these payment means, in consideration of the unique characteristics of a two-sided market.

   According to the results of the analyses, the effects of shocks from the US growth rate on Korea’s real economy have steadily decreased, while the impacts of China’s growth rate have continuously increased. Meanwhile, the effects of the euro region’s growth rate declined significantly right after the financial crisis but have recently grown somewhat, while the effects of Japan’s growth rate have remained weak. Rises in international oil prices caused the domestic economic growth rate to decline, but this effect has weakened since the global financial crisis. Finally, growth in the global trade volume has affected Korea’s exports but not heavily affected its GDP.
 

   The TVP-VAR model, which was developed to reflect changes in the effects of external variables, is seen to have been relatively superior in forecasting the GDP growth rate amid the heightened volatility of variables since the global financial crisis. In future economic forecasting, the TVP-VAR model is expected to serve as a reference model that can supplement the current forecast system, which is based on a structure model.

Accordingly, this paper looks into the recent developments of uncertainties related to Korea's macroeconomy, and examines the economic impacts of heightened uncertainties on the domestic demand sector and the external trade sector. According to the analysis results, growing uncertainties related to the domestic macroeconomy have negative effects, such as the weakening of confidence and increases in financial expenses, and affect the real economy by increasing incentives for precautionary savings. These effects are found to have increased, particularly since the financial crisis. The analysis also shows that increased uncertainties in a country lead to reduced import demand for the country, and in Korea, this has had negative effects on exports through both the direct and indirect trade channels. In addition, the analysis finds that growing domestic uncertainties can weaken real economic variables' sensitivity to policy shifts, thus limiting the effects of monetary policy. This limiting effect becomes stronger the greater the uncertainties are and the longer they persist.

Given these points, to strengthen policy effectiveness, it is necessary to reduce uncertainties surrounding the overall macroeconomy by easing uncertainty of domestic policy, while continuously monitoring for uncertainties in the external sector. In addition, to the degree that growing uncertainties are shown to limit the effects of monetary policy, there should be additional research on monetary policy transmission channels.

   This paper calculates the level of uncertainty in the Korean economy since 2003. To reflect the actual conditions of our economy, which has a high dependence on external trade, this paper selects uncertainty-related indicators in three areas -- economic outlook, financial markets, and the external sector -- and extracts common factors from them. According to the calculation results, uncertainty in Korea was at its lowest level in the first half of 2007, but rose significantly during the global financial crisis and the euro area sovereign debt crisis. The economic uncertainty index is analyzed to have increased since the second half of 2014 due to external factors, such as U.S. interest rate normalization and to the economic slowdown in China.

   According to the results of an empirical analysis using this uncertainty index, heightened uncertainty is found to bring about significant declines in GDP growth and inflation. This seems to be because heightened uncertainty in the macroeconomy negatively affects economic agents’ consumption and investment decisions through channels such as real options, precautionary saving, and financial friction.

  Meanwhile, with Korea’s macroeconomic uncertainty having heightened since the global financial crisis, the recent mounting uncertainty is found to be mainly attributable to external factors. Although it is difficult to directly control overseas factors, we must focus our efforts on lowering the overall level of uncertainty surrounding our economy by working to reduce uncertainty in the domestic sector, including policy-related uncertainty.

   The model is estimated through a Bayesian method and has the following characteristics: First, unlike in conventional new Keynesian ones, in this new model it is seen that growth in government consumption leads to an increase in private consumption. This matches the results of empirical analyses, and results from the existence of rule-of-thumb households in the model and from the private-government consumption complementarity. Second, the government expenditure multiplier is estimated at 0.8 and the government transfer payment multiplier at below 0.8. It is analyzed that, if a closed economy is assumed or if the policy rate is kept at a certain level, the government expenditure multiplier is close to 1. Finally, fiscal rules show that the more the government expenditure responds to business conditions and the more flexible it is, the larger the government expenditure multiplier becomes.

  Therefore, in order to carry out efficient fiscal policy operations, it is judged necessary to strengthen the automatic stabilizer, functions of the fiscal system  and to increase government expenditure in areas having high complementarity with private expenditure.

   In the Korean banking industry, although the number of banks has declined sharply since the Asian currency crisis from liquidations and mergers, most of their businesses have become concentrated on deposits and loans, with competition in the lending market in particular becoming fiercer since the 2000s after business conditions worsened. This increased lending competition among banks may have influenced to some extent their operations.

   Against this backdrop, this paper assesses the level of competition in the banking industry from 2000 to 2015, empirically analyzing the impact of competition on banks’ management soundness. Using the Panzar-Rosse model, this paper estimates the Korean banking industry to be a monopolistically competitive market that is close to perfect competition. In addition, a panel data regression model estimating the relation between individual banks’ level of competition (level of competitive business practices indicated by the Lerner index) and management soundness shows that as an individual bank’s level of competition increases, the higher its NPL ratio and default probability become. This shows that, if the bank lending market becomes more competitive, this may negatively affect Korean banks’ soundness and profitability, since their main revenue source is lending.

  These analysis results have a few implications for the direction of development in the banking industry.
  First, competition among banks should depart from loan expansion and interest rate competition, and spread to various areas of operation that correspond to a new financial environment. In addition, domestic banks should follow global banks in diversifying their operations to include corporate financing, financial investment and asset management, thereby preventing competition among banks from concentrating on lending only.

  Meanwhile, banks need to examine whether they are underestimating risks in the course of their lending competition. Finally, all fields should take an interest in the impact of competition in the lending market on the entire financial system from a macroprudential perspective.

In this regard, the Bank of Korea releases fan charts on the probability distributions of its forecasts for the growth rate, inflation and the current account. Fan charts are effective for grasping the growth paths of individual economic variables and the Bank of Korea’s assessments of their risks. These charts, however, have limitations when it comes to showing the  uncertainties surrounding diverse macroeconomic variables overall. Particularly, under a flexible inflation targeting regime that pursues both price and economic stability, it is difficult to say that fan charts provide sufficient information necessary for policy decision-making.

In this regard, this paper examines a method of estimating a bivariate two-piece normal distribution able to consider uncertainties in both the inflation and the economic growth forecasts simultaneously. It shows that a coefficient of correlation between the economic growth and inflation forecasts, necessary for the creation of joint probability distributions, can be estimated by combining, through an economic model, the information used in the making of the fan charts and the economic forecasts.

   First, this paper calculates five of the main quality of employment indicators: job stability, wages, working hours, skill development, and industrial safety. The results show that Korea is relatively strong in the areas of wages and skill development, but is weak in the areas of job stability, working hours, and industrial safety. Next, this paper conducts an empirical analysis of the relation between the quality of employment indicators and labor productivity, using a dynamic panel data regression model and a panel VAR model to analyze the panel data of OECD countries from 2001 to 2013. The results show that an improvement in the quality of employment has worked to boost labor productivity and improvement in areas such as job stability, wages, and skill development is important. In addition, this paper finds that improving the quality of employment has the effect of significantly increasing both GDP and labor productivity.
       
   The results of the analysis suggest that, to expand the growth potential through improvements in labor productivity, priority should be given to the areas with weak employment quality. Therefore, preventing the abuse of temporary workers, narrowing the gap in working conditions between regular and temporary employees, expanding social security nets, and other such efforts to improve the dual structure of the labor market will be necessary going forward. In addition, the focus of the government's job creation schemes should be placed on increasing high-quality jobs rather than temporary low-paid positions for the youth and other vulnerable groups.

  There are several ways to estimate potential GDP, including the production function approach, which identifies potential GDP by combining productivity and the potential input of production factors such as labor and capital, the HP filtering method, which separates GDP into cyclical and trend GDP and uses the latter as the estimate of potential GDP, and the semi-structural model, which comprehensively models the behavior of GDP, inflation, and other major economic variables to estimate potential GDP. This paper uses these various models to estimates changes in the growth potential of the Korean economy after 2000.

  The results of the estimation show that the potential growth of the Korean economy, at around 5% in the early 2000s, showed a continuing downward trend, and has declined even further since the financial crisis to recently stand at the lower-3% level. When potential growth is broken down into its contributing factors, the contribution of total factor productivity has declined the sharpest, followed by that of capital investment. The contribution of labor input is estimated to have risen slightly in the 2010s, driven by seniors' increased economic participation and a rise in employment in the service sector, such as in health and social welfare services. However, after 2017, when the working-age population will decrease, the contribution of labor input is likely to gradually decline.

  The downward trend of the potential growth since 2000 can be attributed to a combination of changes in the social structure, such as population aging, and problems in the economic structure, such as stagnant productivity in the service sector and sluggish investment. Therefore, to prevent the prolongation of low growth and to boost growth potential, countercyclical policies to ensure economic momentum, along with improvements in the social and economic structure to strengthen economic fundamentals and boost the effectiveness and productivity of all sectors, are more urgent than ever.

   The results of analysis show Korean exports to China to have close connections with the policy curbing the processing trade, with Chinese exports to the world, and with the Chinese government’s policy of increasing its self-sufficiency. The processing trade control policy is estimated to have slowed the rate of growth in Korean exports to China in the quarter when the policy was announced, as well as the following quarter. The rate of growth in Chinese exports to the world has also had a positive relationship with Korean exports to China, although the correlation between them has weakened greatly since 2012. In particular, the rate of growth in petroleum product exports has slowed considerably since that time, showing that the Chinese government’s policy of increasing the degree of the country’s self-sufficiency in this area has had significant impacts in reducing Korean exports to China.

   These findings imply that it is vital to identify the items that the Chinese government has designated as new items under control, for which the degrees of Chinese self-sufficiency need to be increased, to estimate the resulting impacts, and to devise micro response measures depending upon the items concerned.

   The results of an empirical analysis of households’ income and their consumption patterns show that the interconnectedness between them has weakened significantly, and that consumption in particular has undergone structural changes. By household group, this weakening is more obvious among vulnerable households ─ those whose householders are low-income, elderly or self-employed. The factors behind these changes can be separately examined in terms of consumption capacities and of propensities for consumption. Since the global financial crisis households’ consumption capacities have decreased in line with their higher non-consumption expenditures due to increased debt-servicing burdens and housing expenses. At the same time, the greater incentives for precautionary savings by the elderly, the weakened income bases of vulnerable households and the worsened expectations in line with the economic slump have caused households’ propensities for consumption to weaken substantially.

   In order to boost household consumption it is important above all to strengthen the household income base through increases in employment and wages. To restore the relationship between household income and consumption an overall examination of both micro- and macroeconomic policies is also necessary. First, considering the huge debt-servicing burdens of households, the rate of growth in household debt needs to be controlled within a tolerable range, and support measures exclusively for the vulnerable should be strengthened to expand their consumption capacities. In addition, policy efforts should be focused on resolving factors dampening consumer sentiment, including retirement anxieties and economic uncertainties, so that the propensity for consumption will not weaken excessively.