[Seo Joonsik's Market and Economy] Korean Economy on the Operating Table... Shin Hyunsong's Team Must Overhaul Distorted Price Indices and Communication Structure

On April 21, Hyun-Song Shin, a globally recognized expert in macroeconomics, officially took office as the 28th Governor of the Bank of Korea. He also serves as the Chair of the Monetary Policy Board (MPB), the top decision-making body responsible for setting Korea’s interest rates and monetary policy. The appointment of a figure who, during the global financial crisis, championed the importance of financial stability and macroprudential policy-thereby shifting the paradigm of international economic policy-now as the leader of Korea’s monetary authority, has brought both deep reassurance and high expectations to the market.

Hyun-Song Shin, Governor of the Bank of Korea

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However, the macroeconomic ledger that awaits the new governor is far from simple. I have often likened central bank monetary policy to “opening and closing the floodgates of a massive dam.” The liquidity released by lowering interest rates should naturally flow into the “real economy”-that is, production and domestic consumption. Yet, starting in the 2010s, Korea’s monetary policy completely failed in this fundamental mechanism. The floodgates were opened, but the watercourse became distorted, and liquidity flowed heavily into the real estate market instead of production and consumption. On September 30, 2024, in my contribution to this paper titled “Rate Cuts Are Likely to Be a Disaster,” I strongly argued for the “futility of liquidity expansion.” Nevertheless, from the very next month, the base rate was lowered from 3.5% to 2.5% over just eight months, and the concerns raised then have since materialized in today’s results.

The “distorted real estate market” created by years of accumulated decisions by the Monetary Policy Board and “household debt” that has reached its limit have already become chronic conditions that are difficult to cure with any ordinary remedy. The explosive growth in household debt and rising housing costs have led to weakened effective demand, meaning the domestic consumption base has eroded, and the public is paying a harsh price.

Major surgery is needed. However, the difficulty is even greater because this surgery must be performed without general anesthesia. With this awareness in mind, I wish to propose two reforms to the new governor.

First, the structural flaws in the inflation index must be corrected. Why did the Monetary Policy Board’s rate-setting system remain under the illusion of “price stability” for decades, even as real estate prices soared? The fundamental reason lies in the “statistical distortion” that the share of housing costs reflected in the Consumer Price Index (CPI) is excessively low. In major advanced economies such as the United States, the weight of housing costs, including Owner’s Equivalent Rent (OER), exceeds 30% in price indices. When house prices and rents rise, this is immediately reflected in inflation statistics, prompting central banks to preemptively adopt tightening policies to contain it. The structure naturally links the real estate market-often the primary driver of perceived inflation-to monetary policy.

In contrast, Korea’s price index has long maintained a distorted “basket” structure that severely underrepresents changes in jeonse (long-term deposit rent) and owner-occupier housing costs. While the actual housing burden multiplied and disposable incomes of ordinary citizens were sucked into a “black hole” of housing expenses, the “official inflation rate” presented on the Bank of Korea’s conference tables remained a stable 1-2%. The distortion in the index led to distortion in policy; under the pretext of price stability, the low interest rate regime endlessly fueled the real estate “monster.”

What is even more disappointing is that, despite the long-standing nature of this problem, there has been virtually no genuine self-reflection or criticism from within. Many members have participated in the Monetary Policy Board over the years, but it is difficult to find any record in the MPB’s past minutes of acknowledging the limitations of the index, spearheading a revision of the inflation basket, or at the very least, rigorously debating how to translate rising real estate prices into actual inflationary pressure to be reflected in monetary policy.

Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-chul and Bank of Korea Governor Shin Hyun-song are holding a first dinner meeting at the Banking Hall in Jung-gu, Seoul, on April 23, 2026. Photo by Dongjoo Yoon

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Second, the Monetary Policy Board must become a body that communicates with the public. Currently, the Board’s policy-making process and the reasoning of individual members are not sufficiently disclosed to the public. As a result, for most people, the Board feels less like a “core body steering the national economy” and more like a “mysterious organization that occasionally announces interest rates.” Of course, the nature of monetary policy requires caution. However, excessive limitations on communication can breed misunderstanding and distrust regarding policy. Policy earns trust not only through its outcomes but also when its process and rationale are clearly explained. The suspicion, raised in some quarters, that “the Board only represents the interests of the establishment,” is largely rooted in this lack of communication.

This stands in stark contrast to the U.S. Federal Reserve. Interestingly, Fed governors frequently give speeches and interviews, explaining their economic outlooks and the basis for their policy judgments. While such transparency can lead to short-term market volatility, in the long run, it increases the predictability and credibility of policy. Now, the Monetary Policy Board must also evolve. Board members should not just be technocrats who set rates, but “public interpreters” who explain the direction of the national economy. They must be experts in handling numbers and able to explain what those numbers mean for people’s lives.

The changes required of Governor Hyun-Song Shin go beyond mere policy tweaks. The Bank of Korea must thoroughly break away from the path-dependent, unquestioning course it has followed in the past. Central bank independence is not just about keeping a distance from the government. It must also mean independence from outdated indicators, from rigid thinking, and from the inertia that prevents self-criticism of past mistakes.

The public is no longer a passive recipient of policy results, but an agent who understands and evaluates the context of policy. The Bank of Korea must move away from the past, when it hid behind distorted price indices to pursue “price stability,” and instead build a monetary policy framework that directly incorporates real inflation-including housing costs-and considers both asset markets and the real economy. At the same time, the Monetary Policy Board should move beyond a structure where important decisions are made quietly and only explained after the fact, toward one in which the process of rigorous deliberation and judgment is shared with the public. Just as opening the floodgates is important, it is equally vital to carefully predict where the water will flow and to explain this responsibly.

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Seo Joonsik, Professor of Economics, Soongsil University

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