Busan, Jeju, Seoul, Gangwon Particularly Vulnerable to Interest Rate Hikes... Recession Concerns Amid Tightening

The Bank of Korea: "Monetary Policy Effects Vary by Region"

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held on the 25th of last month at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

The Bank of Korea announced that four regions?Busan, Jeju, Seoul, and Gangwon?are more significantly affected by monetary policy compared to other areas.

On the 26th, the Bank of Korea explained in its Regional Economic Report, "The effects of monetary policy vary depending on regional industries, population, income structures, and other factors."

Monetary policy is determined by reflecting macro variables such as inflation and economic conditions faced by a country, and it indiscriminately impacts all economic agents and sectors. However, since economic conditions differ by region, the degree of impact can vary accordingly.

From this perspective, the Bank of Korea analyzed and compared the differential impacts of the sharp interest rate hikes after COVID-19 across regions in terms of production, consumption, and employment.

The results confirmed that regions with lower manufacturing shares and income levels, and higher proportions of elderly population and household debt ratios, experienced stronger effects from monetary policy.

Among these, the income level and household debt ratio showed results generally consistent with previous studies, but the manufacturing share and elderly population proportion yielded somewhat different outcomes.

Regarding the lesser effect of monetary policy in regions with a high manufacturing share, the Bank of Korea explained, "In Korea, many manufacturing firms are export-oriented and relatively large in scale. Export-oriented manufacturing is more influenced by the global economy than the domestic economy, and larger firms have greater capacity to absorb shocks from interest rate changes."

As for the stronger monetary policy effects in regions with a higher elderly population proportion, it was analyzed that "many elderly individuals are self-employed or non-wage earners, which likely amplifies the impact of monetary policy shocks."

Examining manufacturing share, income level, elderly population proportion, and household debt ratio, the Bank of Korea found that Busan and Jeju fell into the top 25% of regions most affected by monetary policy shocks in three of these variables, while Seoul and Gangwon were in the top 25% for two variables.

Most of these regions were also relatively more affected by the COVID-19 shock. The Bank of Korea pointed out concerns that during the implementation of tight monetary policy due to supply-side inflationary pressures, as seen last year, these regions may experience concentrated economic downturn effects.

The Bank of Korea stated, "If excessive economic slowdown is expected in specific regions due to differing regional monetary policy transmission effects, it is necessary to consider appropriate micro-level policy responses tailored to each region. Support through fiscal policy and appropriate policy cooperation can be provided to regions heavily impacted by tight monetary policy, and complementary use of funds supporting local small and medium-sized enterprises from the monetary policy side can be considered."

Lee Chang-yong, Governor of the Bank of Korea [Image source=Yonhap News]

Meanwhile, using the Regional Competitiveness Index (RCI) based on 2020 data, the Bank of Korea compared regional competitiveness by city and province, finding that Seoul, Gyeonggi, Daejeon, and Gwangju have high regional competitiveness, while Gangwon, Gyeongbuk, Gyeongnam, and Chungnam are evaluated as having low regional competitiveness.

Among the top regions, Seoul and Gyeonggi showed higher scores than other areas in fundamentals, efficiency, and innovation capabilities, indicating a significant gap between the metropolitan area and non-metropolitan regions.

Notably, among the lower-ranked four provinces, 48 cities, counties, and districts were designated as population decline areas by the Ministry of the Interior and Safety. This accounts for 54% of the total 89 population decline areas across the 17 provinces, highlighting the need to ensure that basic regional functions are not impaired in low-competitiveness areas, according to the Bank of Korea.

Looking at the regional competitiveness of Daegu and Gyeongbuk, which have low RCI scores, there was an overall decline from 2018 to 2020. This was due to a relative weakening in fundamental and efficiency capabilities.

The Bank of Korea stated, "The decline in relative scores in the institutional sector of fundamental capabilities, caused by difficulties in starting businesses due to administrative procedures such as permits, can be improved in the short term through local government support programs and simplification of unnecessary procedures. Therefore, continuous improvement efforts by local governments are necessary."

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