"Rising US Long-Term Interest Rates Increase Volatility and Heighten Domestic Economic Uncertainty"

[Asia Economy Reporter Jeong Hyunjin] As long-term interest rates in the United States rise, volatility in the domestic financial market is increasing, leading to a decline in stock prices and the value of securities, a greater possibility of overseas capital outflow, and potentially negative effects on the real economy, which has already been hit by COVID-19.

The Korea Economic Research Institute (KERI) stated in its report titled "Comparison of Korea-US Monetary Policies: Financial Crisis vs. COVID-19" on the 25th, "Time series analysis results show that the rise in US long-term interest rates increases US credit spreads and term premiums." KERI analyzed that the rise in US long-term interest rates causes upward shocks to domestic long-term interest rates, the won-dollar exchange rate, and risk premiums, thereby expanding volatility in the financial market and accelerating the outflow of foreign capital such as foreign investment.

Lee Seungseok, a senior researcher at KERI, explained, "If the rise in US long-term interest rates stimulates major domestic financial indicators and causes increased volatility in the financial market, foreign capital outflows such as foreign stock investments may occur, leading to negative effects like stock market declines."

Through macro-variable analysis, KERI viewed that the effect of rising US long-term interest rates transmits through financial market channels to the real market, causing contraction in key macro fundamental variables such as domestic gross domestic product and investment. Senior researcher Lee stated, "If the rise in US long-term interest rates spreads to the real market through the financial market, it could further delay the sluggish economic recovery despite positive factors like vaccine distribution."

Lee also said, "In the future, Korea's monetary policy needs to move beyond a short-term interest rate targeting policy centered on the base rate and make more active efforts to stabilize long-term interest rates." He evaluated, "Although the Bank of Korea partially adopted unconventional monetary policy tools during the COVID-19 response, it is true that fiscal policy-biased economic stimulus has been carried out." He added, "To proactively respond to asset price declines such as sharp drops in stock indices and to alleviate the increased funding costs burden on various economic agents during the economic crisis, it is desirable to stabilize long-term interest rates downward to maximize economic recovery."

This content was produced with the assistance of AI translation services.