Monetary and financial policies dominate economic conditions. The former remains at the heart of focus today as the Bank of Korea (BOK) struggles to strengthen its identity as an effective institution insular from political clout.
Questions arise regarding the BOK's approach to economy, however. While conventional wisdom dictates that lowering interest rates will boost the economy, encouraging investment, which in turn spurs consumer spending, thereby inviting vitality in the always "moribund" economy, counter evidence remains vivid.
The 2008 financial crisis demonstrates that low interest rates encourage borrowing cheap money and irresponsible spending, fooling frugal savers. Entrepreneurial investment, such as plant and equipment investment or investment in research and development (R&D), yes, revitalizes the economy; to this day, no signs of such optimism have surfaced.
Low interest rates bring out the intended effect with a premise of entrepreneurial investment. Otherwise, the central bank should rather compensate frugal savers with heightened interested rates, until entrepreneurs ready for "animal spirit" central to unprecedented investment.
Questions arise regarding the BOK's approach to economy, however. While conventional wisdom dictates that lowering interest rates will boost the economy, encouraging investment, which in turn spurs consumer spending, thereby inviting vitality in the always "moribund" economy, counter evidence remains vivid.
The 2008 financial crisis demonstrates that low interest rates encourage borrowing cheap money and irresponsible spending, fooling frugal savers. Entrepreneurial investment, such as plant and equipment investment or investment in research and development (R&D), yes, revitalizes the economy; to this day, no signs of such optimism have surfaced.
Low interest rates bring out the intended effect with a premise of entrepreneurial investment. Otherwise, the central bank should rather compensate frugal savers with heightened interested rates, until entrepreneurs ready for "animal spirit" central to unprecedented investment.
Choi Si-young
Honorary editor-in-chief of Yonsei European Studies, Yonsei University
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