The Bank of Korea: "Korea Exhibits 'Monetary Illusion' Phenomenon Ignoring Inflation"

[Asia Economy Reporter Kim Eunbyeol] Although prices are soaring as the country recovers from the shock of COVID-19, an analysis has emerged that a phenomenon called 'money illusion,' where people make judgments without considering price changes, is appearing among the public.

According to the 'BOK Economic Research - A Study on Money Illusion in Korea' released by the Bank of Korea on the 28th, a survey conducted by the Bank of Korea on 500 adult men and women aged 20 to 59 showed a clear presence of money illusion.

Most respondents evaluated gains and losses in housing transactions or general transactions, as well as wage levels and fairness, based on nominal values rather than real values.

For example, when asked to rank three people who made housing transactions from best to worst based on their deals, 56.4% (282 people) of respondents chose the person with the highest nominal return as the best investor. Even when a specific company decided to cut wages, respondents considered the nominal wage cut unfair rather than focusing on the extent of inflation.

A regression analysis on which respondents exhibited stronger money illusion showed that higher education levels were associated with less money illusion. However, it was analyzed that this phenomenon was not simply due to a lack of cognitive ability or understanding of the concept of inflation.

Additionally, the Bank of Korea found that the greater the money illusion, the smaller the household net asset size among residents in provincial areas. This suggests that money illusion may have some negative impact on household asset accumulation. Money illusion was also found to have a weak negative relationship with stock investment experience.

Furthermore, in additional survey items, the Bank of Korea confirmed that Korean adults exhibit various behavioral traits such as loss aversion, reference dependence, and framing effect, in addition to money illusion.

In the report, the Bank of Korea stated, "The survey results showing that Korean households possess money illusion suggest that nominal variables should be considered as importantly as real variables in macroeconomic analysis and forecasting." It added, "It was also confirmed that framing effects influence preferences regarding economic policies, indicating that when formulating and communicating economic policies, various behavioral characteristics should be taken into account to design policies and communicate effectively with economic agents."

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