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[Vol.21 No.2] Reasons for Recent Decline in Economic Volatility, and Implications

Group :
Economic Research Institute (+82-2-759-4190) 2015.06.30 2650

Authors :Hwan-Koo Kang(the Bank of Korea), Sei-joon Park(the Bank of Korea), Jihoon Ahn(the Bank of Korea), Jongik Park(the Bank of Korea), Sunghee Ahn(the Bank of Korea)




Since the global financial crisis the Korean economy has experienced a conspicuous contraction in volatility, together with a slowdown in growth. Generally speaking, a contraction in economic volatility has some effect in promoting growth and investment by expanding economic stability and lessening the degree of uncertainty. On the other hand, however, if economic uncertainty still exists while the trend growth rate keeps falling, it will be negatively regarded as an obstacle to recovery. We accordingly analyze the recent contraction in Korean economic volatility and try to determine its various reasons, which we expect will provide some relevant policy implications.
Our analysis finds that the recent decline in volatility have been caused by many factors, including a contraction in inflation volatility, an expansion in the size of the service industry, the reduced volatility in the world economy, and the persistent decline in the trend growth rate. For future policy, while closely monitoring the movements of economic volatility, it should be rigorously checked whether the contraction in volatility is attributable to structural restraints on the drivers of endogenous economic growth or to declines in the size of external shocks.