[2016-5] The Economic Impacts of Heightened Uncertainties

Policy Federal Incentives Expenses Domestic Brexit Growing US Crisis
Research Department

As external uncertainties have recently mounted due to the possibility of Brexit, potential additional policy rate hikes by the US Federal Reserve, and China's financial unrest and economic slowdown, there has been growing interest in the economic impacts of these uncertainties.


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.

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