Analysis has emerged suggesting that population aging lowers real interest rates and also worsens the capital soundness of banks. Smaller banks were found to be more sensitive to the impacts of aging. A study also noted that during economic crises, government support should be focused on dual-income households.
On the 19th, Deputy Researcher Hwang Seol-woong of the Bank of Korea presented a paper titled "The Impact of Population Change on Interest Rates and Financial Stability" at the World Economists Conference held at Coex in Samseong-dong, Seoul.
South Korea's real interest rates have steadily declined since the 1990s, remaining in the 0% range recently. The research team analyzed the background of the recent shift to a downward trend in South Korea's real interest rates, which had maintained a high level compared to major countries between 1991 and 2019, using an open economy life cycle model.
The main factors identified in the analysis that have dragged down real interest rates were the increase in life expectancy and aging. Households have increased their savings in preparation for retirement, which has led to a decrease in interest rates. While the decline in birth rates was also pointed out as a reason, it was found to have a more direct impact on economic growth than on interest rates.
Aging has also affected the stability of the financial system. According to a long-term analysis of data from 7,173 banks across 28 countries by Deputy Researcher Jang Hoon of the Bank of Korea, aging has weakened banks' capital adequacy and soundness while increasing the ratio of non-performing loans. Smaller banks were more sensitive to the impacts of aging.
At the event, research results on the spousal labor response to changes in the primary income earner's wages, featuring Commissioner Jang Yong-sung of the Bank of Korea, were also disclosed. The study involved Commissioner Jang along with researchers Harberson and Marios Karavabarounis from the Federal Reserve Bank of Richmond, U.S.
According to the research team, when the income of the primary income earner in dual-income households decreases by 10%, the spouse's labor market participation increases by 1.5 percentage points (p) or the spouse's income rises by 1.2%. This effect was particularly pronounced in households with assets that do not even reach one month's salary. Under the same conditions, the labor market participation rate of spouses increased by 2.3%p.
Based on these results, the research team analyzed desirable government support policies. In this process, the team investigated how much the overall labor market participation rate, income, and consumption decrease under four scenarios: ▲ no support ▲ universal grants to all households ▲ support only for households that experienced income shocks ▲ differentiated support for dual-income households among those with income shocks.
The analysis found that providing differentiated support to dual-income households affected by income shocks was the most effective policy in terms of labor market participation rates and household consumption, while the policy of universal grants to all households was the worst, reducing both labor supply and consumption. Conversely, not providing financial support resulted in lower fiscal burdens but decreased overall income and consumption.