BOK: Households with More Experience of Currency Surges Show Limited Consumption Contraction

▲ Bank of Korea headquarters

A research report by the Bank of Korea shows that the impact of soaring exchange rates on household consumption varies across generations.

The analysis indicates that even under the same exchange rate shock, consumption responses differ depending on how much past experience households have had with sharp exchange rate fluctuations.

Choi Young-jun, a deputy director at the BOK Economic Research Institute, stated in a report released today (October 1) that "the more experience households have with surging exchange rates, the more limited the negative impact of rising exchange rates on household consumption appears to be."

Specifically, Generation X (born between 1965 and 1979) did not significantly cut household consumption despite soaring exchange rates, whereas the MZ generation (born between 1980 and 1995) reduced consumption relatively more.

Regarding the background, Deputy Director Choi estimated that "Generation X may have formed adaptive consumption behaviors to cope with high exchange rate levels by repeatedly experiencing relatively high exchange rate levels during their labor market participation and asset-building processes following the 1997 Asian financial crisis."

As for the MZ generation, he noted that "because the period during which they directly experienced large-scale exchange rate increases is relatively short, it likely limited their opportunities to learn and adapt consumption behaviors responding to periods of high exchange rate levels."

Additionally, the analysis showed that households with relatively fewer assets and those with higher debt service ratios (DSRs) did not significantly reduce consumption despite soaring exchange rates.

He cited household "adaptation" as the reason why, noting that "recently, exchange rates rose to the 1,500-won range, but household consumption did not contract significantly."

Deputy Director Choi said, "These analysis results show that households can adapt to changing economic environments in the process of experiencing repetitive exchange rate surges," adding, "It is necessary to support household adaptation by enhancing the predictability of policies."

He also added, "Related policies should be pursued in a direction that considers changes in household consumption behavior and consumption gaps between different classes."

(Photo: Yonhap News)

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