What's in the R- Stars for Korea?

March 26, 2021

Preview Citation

Format: Chicago

Sohrab Rafiq. What's in the R- Stars for Korea?, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Korea’s stars tell of an economy saddled with a real neutral rate (r-star) that has declined significantly in recent decades and is currently below zero. This reflects a significant decline in trend growth, and two large financial crises that triggered significant shifts in the saving-investment balance. Larger fiscal deficits and frothy financial conditions since 2012 have helped offset rising demand for safer assets, preventing the neutral rate from falling further. Nonetheless, the fall in the neutral rate, coupled with its effects on asset returns, has complicated the task of monetary policy stabilization. Korea’s neutral rate is likely to remain low over the medium-term and could fall further, reflecting a structural savings-investment imbalance owing to declining productivity and a rotation in demographics increasing the demand for precautionary saving and convenience yield, and widening the capital risk premia. The COVID pandemic risks magnifying these trends.

Subject: Financial crises, Financial services, Inflation, National accounts, Output gap, Prices, Production, Real interest rates, Return on investment

Keywords: Author's email, Convenience, Demographics, Global, Inflation, Korea rate expectations decomposition, Neutral Rate, Output gap, Real interest rates, Real rate of interest, Return on investment, Risk Premia, Savings, Savings-investment imbalance

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/093
Stock No:

WPIEA2021093
ISBN:

9781513575223
ISSN:

1018-5941

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