KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2026. 3

■	The Korean economy continues to see strong semiconductor momentum and a recovery in consumption, but production growth remains modest amid the downturn in construction.

	○	Export values remain on a favorable trajectory, led by ICT products, but this has yet to translate into higher production volumes.

	-	Despite weakness in other export categories, the sharp rise in semiconductor export values continues to support overall export growth.

	-	Semiconductor prices have surged amid strong demand while supply remains constrained.

	-	By contrast, manufacturing production excluding semiconductors continues to show only modest growth.

	○	Services production shows solid momentum on the back of improving consumption, while weakness in construction investment appears increasingly prolonged.

	-	Consumption continues a gradual recovery, supported by gains in real purchasing power.

	○	Meanwhile, external uncertainty rose as international oil prices surged following the outbreak of the war in the Middle East.

	-	Amid heightened uncertainty regarding the course of the war, sustained high oil prices could place upward pressure on consumer prices.

Summary

Policy Study KOR The Role of Invoicing Currency in International Trade: Determinants and Implications

This study examines the determinants of invoicing currency choice in South Korea’s international trade and analyzes how exchange rates affect trade outcomes across invoicing currencies. Using Korean product-level customs data, it documents distinctive patterns in Korea’s invoicing currency composition and identifies key factors shaping firm-level currency choices for exports.

These factors include the invoicing currency composition of imported intermediate goods, firm-level foreign-currency debt ratios, past invoicing practices, export market share, foreign exchange market size, invoicing currencies of competitors, and exchange rate volatility.

The results show that the degree of exchange rate pass-through varies significantly by invoicing currency, leading to meaningful differences in export volumes. Building on these findings, the study investigates the impact of recent exchange rate movements on Korea’s exports and demonstrates that the dominance of the U.S. dollar as invoicing currency imposes significant constraints on Korean export performance.

This study provides an updated and comprehensive overview of Korea’s invoicing currency patterns in trade, offering rich implications regarding the determinants and consequences of invoicing currency choice. The findings are expected to inform ongoing policy discussions on the revision of the Foreign Exchange Transactions Act, the internationalization of the Korean won, and broader initiatives aimed at advancing Korea’s foreign exchange market.

Summary

Research Monograph KOR Monetary Policy Transmission to the Korean Bond Market

This study quantitatively examines the transmission channels through which domestic and external monetary policy shocks affect the yields of Korean Treasury Bonds (KTBs). To this end, it proposes a new methodology that decomposes long-term KTB yields into expected policy rate paths and term premia and analyzes the interaction between monetary policy and the government bond market through this decomposition. Specifically, the study develops and estimates a four-factor linear term structure model that incorporates gradual structural changes in the level of the KTB yield curve. A comparison with the conventional three-factor model shows that the proposed four-factor model is statistically superior.

The estimation results indicate that, when yields are decomposed into trend and cyclical components, cyclical fluctuations account for a larger share of yield variation at shorter maturities, whereas trend components dominate at longer maturities. The expected policy rate path is extracted from the estimated term premia, suggesting that policy rates are expected to remain broadly stable in the near term and decline gradually thereafter. Analysis of the interaction between monetary policy and the bond market shows that policy rate shocks significantly raise expected policy rates, while shocks to expected policy rates also lead to increases in the actual policy rate. This implies a high degree of mutual credibility between the central bank and the government bond market.

Using this decomposition, the study examines the effects of domestic and U.S. monetary policy shocks on KTB yields. Domestic monetary policy shocks generate significant spillovers across the entire yield curve, from short- to long-term maturities. Short-term yields respond mainly through changes in the expected policy rate path, whereas long-term yields respond more strongly through adjustments in term premia. In contrast, U.S. federal funds rate shocks do not exert statistically significant effects on KTB yields. However, U.S. forward guidance and quantitative easing shocks exert meaningful impacts. Quantitative easing shocks produce larger short-term effects, while forward guidance shocks exhibit greater persistence. Nevertheless, these spillovers are considerably shorter-lived than those from domestic monetary policy shocks, highlighting the relative independence of Korea’s monetary policy.

The study also analyzes the Korean corporate bond market in the context of domestic and external monetary policy. Although the corporate bond market has expanded steadily in terms of outstanding issuance, secondary market liquidity remains limited, with turnover ratios substantially lower than those in the government bond market and trading concentrated in financial bonds. U.S. monetary tightening is found to reduce corporate bond trading volumes and widen credit spreads, with a 25 bp increase in the U.S. policy rate leading to an immediate spread widening of 11―13 bp. Over a horizon of one to three months, corporate bond spreads increase by 28―56 bp. Domestic monetary policy shocks also have significant effects on corporate bond yields, with particularly pronounced responses in lower-rated (BBB-) bonds. By contrast, firm-level financial conditions do not appear to systematically influence the sensitivity of corporate bond yields to U.S. monetary policy shocks, likely reflecting a flight-to-quality behavior during tightening episodes.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2026. 2

■	The Korean economy continues to register a moderate expansion in overall output, led by the service sector amid a gradual improvement in consumption conditions.

	○	Investment remains subdued, but exports―led by semiconductors―continue on a modest upward path, alongside a gradual recovery in consumption.

	-	The value of construction completed remains subdued, as activity continues to be weighed down by weakness in regional real estate markets, despite some easing in the pace of decline; equipment investment also continues to contract.

	-	Export volumes increase at a more moderate pace, while export values rise sharply, reflecting a surge in semiconductor prices.

	-	Consumption continues to recover from earlier weakness, supported by rising household income and the cumulative impact of interest rate cuts, with consumer sentiment staying elevated.

	○	On the production side, the continued recovery in the service sector supports a moderate increase in all-industry production.

	-	Improvements in consumption translate into relatively solid growth across most service industries.

	-	Manufacturing production declined slightly, as automobile output weakened following U.S. tariff measures, while semiconductor production remained somewhat constrained by supply limitations despite a surge in demand.

	○	At the same time, external uncertainty intensifies somewhat, reflecting the risk of additional U.S. tariff hikes and increased volatility in oil prices.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2026. 1

■	Overall production in the Korean economy continues to expand at a modest pace, underpinned by improving consumption, even as weakness in construction persists and manufacturing undergoes some adjustment.

	○	Construction activity remains in sharp contraction and continues to act as a primary constraint on the pace of economic recovery.

	○	Semiconductor-related export values maintain strong growth amid favorable market conditions; however, this performance largely reflects sharp price increases, while previously elevated production growth has moderated.

	-	Meanwhile, as production outside the semiconductor sector sustains only modest growth, manufacturing business sentiment remains at low levels.

	○	However, consumption continues to improve, with retail sales maintaining modest growth and services production showing signs of recovery.

	-	The Composite Consumer Sentiment Index (CCSI) remains at a relatively elevated level, while business sentiment in non-manufacturing sectors continues to improve.

	-	Despite ongoing weakness in construction and manufacturing, growth in the number of employed persons has edged up slightly, led by services.

Summary

Research Monograph KOR The Impact of Increased Government Bond Issuance and Policy Directions

This study analyzes the repercussions of the sharp increase in government bond issuance following the economic crisis induced by COVID-19. The surge in the issuance of government bonds in South Korea was substantial, driven by the need for financial resources to support expansive fiscal policies in response to the pandemic. As government bond issuance rises, so does the yield on government bonds. Given that the demand in the financial market comprises households, businesses, the government, and external sectors, the increased issuance not only affects government bond yields but also leads to a rise in interest rates faced by households and businesses.

Conversely, the study explores the impact of government bond buy-backs on yield changes, offering a direction opposite to that of increased issuance. Utilizing a dynamic Nelson-Siegel model with macro factors, including macroeconomic variables, the study estimates changes in the yield curve resulting from both increased issuance and buy-backs. Empirical analysis reveals that a 1 trillion KRW increase in government bond issuance leads to a 2.5 to 2.9 basis points rise in yields, particularly pronounced in the medium to long-term maturities. Conversely, a 1 trillion KRW increase in government bond buy-backs results in a 1.9 to 2.1 basis points decrease in yields, with a more significant impact on medium to long-term maturities with relatively less demand.

Moving on to domestic demand factors, the study examines the influence of macroprudential regulations on government bond yields. Specifically, it analyzes the impact of restrictions on securities firms' participation in the call market and banking sector liquidity regulations, such as the Liquidity Coverage Ratio (LCR). These regulations, introduced to maintain stability in financial systems post-global financial crisis, have direct and indirect effects on government bond demand, consequently influencing market interest rates and resource allocation.

The analysis indicates that restricting securities firms' call market participation to below 25% of equity leads to a substantial increase in securities firms' participation in the repo market. Consequently, the demand for government bonds by securities firms increases, resulting in a yield decrease of approximately 10.8 to 12.5 basis points. Similarly, the phased introduction of LCR regulations leads to increased demand for government bonds by banks, contributing to a yield decrease of around 6.1 to 7.3 basis points. These findings underscore the importance of considering the ripple effects on financial markets through government bond demand when adjusting the intensity of financial stability regulations.

Lastly, the study examines the impact of external uncertainties, represented by global volatility (VIX), on foreign capital flows and exchange rates. Traditionally, an increase in VIX corresponds to capital outflows and currency depreciation. However, recent observations indicate a decrease in the magnitude of these effects, suggesting a shift in the behavior of foreign investors in government bonds. The study concludes by highlighting the need to consider the potential effects on financial markets through government bond demand when adjusting or introducing financial stability regulations in the future.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, November 2025

Heterogeneity and Gross Worker Flows / WEH-SOL MOON

This paper extends the three-state model of labor supply and worker flows developed by Krusell, Mukoyama, Rogerson and ahin (American Economic Review, 2017) to study dynamic individual behavior by allowing for ex-ante heterogeneity in workers’ abilities in the market and in their valuation of non-market time. The extended model replicates the key features of the distributions of personal employment rates, OLF rates, and residual wages found in the SIPP data. Individuals with relatively high rents from being employed are more likely to stay in the labor force by cycling back and forth between employment and unemployment from month to month. Individuals with relatively low rents from employment transition between employment and OLF.

Decomposing the Growth of Part-time Work in South Korea, 2010-2024 / SU HWAN CHUNG

This paper examines the factors contributing to the growth of part-time work in South Korea from 2010 to 2024, during which the fraction of part-time workers doubled. A decomposition analysis suggests that changes in the workforce composition account for approximately 30 percent of this growth, primarily driven by workforce aging. However, the explanatory power drops to around 10 percent when excluding workers likely to participate in a government program providing parttime jobs for older workers. This limited explanatory power is attributed to substantial within-group increases and a declining fraction of young workers, partially offsetting the expansion of older workers. These findings suggest that further research is needed to investigate factors beyond compositional changes to explain the recent growth of part-time work in South Korea.

Heterogeneous Impacts of the U.S.-China Trade War on Korea: What Drives Industry Differences? / HEEHYUN LIM

This paper analyzes how the U.S.China trade war affected Korean industries and identifies the industry characteristics that determined which industries gained or lost. I show that heterogeneity in responses is closely linked to capital intensity and export intensity, highlighting the role of economies of scale and export readiness. Using detailed industry-level data from Korean manufacturing, the analysis finds that capital-intensive industries with substantial pre-war investments and industries with high export intensity achieved greater growth and cost reductions following the tariff shocks. These findings indicate that industries positioned to expand their scale captured the gains, while others were left behind, emphasizing the importance of targeted and differentiated policy support for pre-investment, capital deepening, and export infrastructure ultimately to enable more industries to leverage external trade disruptions as opportunities for sustained growth.

Effects of Weather Conditions on Price in Korea / Seunghee Lee

This paper examines the effects of unexpected changes in weather conditions on inflation in Korea. Using a structural vector autoregression (SVAR) model, we analyze how changes in temperature and precipitation influence price dynamics across different components of the consumer price index (CPI). Our empirical analysis reveals that unexpected changes in weather indices induce significant volatility in fresh food prices and exert direct impacts on consumer inflation, with precipitation changes contributing more substantially to short-term price increases than temperature variations. The effects are particularly pronounced during summer. However, core inflation, which excludes volatile food and energy components, remains largely unresponsive to weather indices. Through a regression analysis examining the interaction between headline and core inflation, we find that consumer prices tend to revert to core inflation levels, suggesting that weather-induced price fluctuations have limited medium-term impacts on the underlying inflation trend. These findings indicate that while weather changes may increase short-term price volatility through agricultural supply disruptions, monetary policy responses to such temporary fluctuations may be ineffective. Accordingly, alternative policy measures focusing on supply diversification and climate resilience should be prioritized.

Summary

Policy Study KOR The Macroeconomic Effects of Social Welfare Reform in South Korea

This study examines the macroeconomic and welfare impacts of replacing South Korea’s targeted income support programs with a universal income support system. A life-cycle overlapping generations (OLG) model with heterogeneous households is constructed to reflect existing programs, such as basic livelihood assistance, child allowances, earned income credits, and public pensions, and to incorporate institutional features and household-level income distribution, including joint household labor decisions.

Simulations of five policy scenarios show that universal benefit increases aggregate output but reduces social welfare due to weaker safety net effectiveness. Program impacts vary, suggesting well-designed targeted schemes may outperform universal income support. Findings also highlight the importance of aligning income support policies with household needs while ensuring fiscal sustainability.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.12

■	The Korean economy continues to exhibit a modest improvement led by consumption, while weakness in the construction industry persists.

	○	Although weakness in the construction industry has been prolonged, consumption continues to improve as the effects of base rate cuts feed through with a lag and government support measures remain in place.

	○	As a result, services production remains solid, supporting a modest increase in all-industry production.

	-	Employment in sectors closely linked to consumption also shows a gradual easing of weakness.

	○	Meanwhile, export growth expanded due to favorable semiconductor conditions, although trade-related uncertainty persists.

	-	Trade in non-semiconductor items weakened somewhat amid high U.S. tariff rates.

	-	Semiconductor exports remain robust, but part of their strength reflects the surge in prices; in volume terms, the previously strong gains are gradually moderating.

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