Risks of Short-termism in Macro-prudential Policy Making: The Case of Household Debt in Korea

KDI Policy Forum No. 272(2019-01), eng.

10 Pages Posted: 16 May 2019

See all articles by Young Il Kim

Young Il Kim

Korea Development Institute (KDI)

Date Written: February 19, 2019

Abstract

링크를 클릭하시면, 이 보고서의 한국어 버전을 보실 수 있습니다: https://ssrn.com/abstract=3389036.

English Abstract: Korea’s household debt continues to be a major economic risk despite countermeasures, necessitating a thorough overhaul of the current macro-prudential management system.

The debt expanded to 1,514 trillion won in 3Q 2018 from a decade ago (713 trillion won in 2008), considerably exceeding the income growth during the same period.

The rapid increase suggests that past policy measures have been ineffective in achieving a soft landing.

This study adopts a political economy perspective to determine the obstacles to past macroprudential policies, which can be effective tools in terms of credit risk management, and suggests directions for improvement.

It was found that the more fixated policy makers are on the short-term gains in growth and employment, the less likely they are to seek macro-prudential policies for financial stability.

Short election cycles can narrow the horizon of policy decisions, hence policy makers often pursue those with immediate outcomes to earn the public’s favor―even if they entail negative fallouts.

The failure to implement suitable and timely macro-prudential policies will increase the probability of a credit boom-driven crisis and restrict the scope of mid- to long-term economic policies.

To improve the macro-prudential management system, its institutional basis needs to be consolidated to prevent the policy horizon from becoming narrower.

An institutional mechanism should operate the macro-prudential management system in correspondence with the mid- to long-term preference of the national economy.

More practical measures should be considered and adopted which could strengthen public accountability and the operational independence of the macro-prudential management system.

Suggested Citation

Kim, Young Il, Risks of Short-termism in Macro-prudential Policy Making: The Case of Household Debt in Korea (February 19, 2019). KDI Policy Forum No. 272(2019-01), eng., Available at SSRN: https://ssrn.com/abstract=3389039

Young Il Kim (Contact Author)

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

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