KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.11

■	Despite weak construction investment and slower export growth, the Korean economy shows signs of a modest improvement, led by consumption.

	○	The semiconductor sector remained buoyant, but export growth gradually slowed due to negative spillover from U.S. tariff hikes. Construction investment also continued to lose momentum.

	-	With exports to the U.S. declining steadily and weakness persisting in non-semiconductor items, average daily exports showed a modest slowdown.

	○	However, consumption has been recovering gradually, supported by lower market interest rates and policy measures to stimulate spending.

	-	As a result, services production continued to improve, particularly in sectors tied to domestic demand, such as wholesale and retail trade.

	○	Meanwhile, although trade conditions have improved somewhat,with progress in KoreaU.S. trade negotiations and easing U.S. China trade tensions, uncertainty persists.

Summary

KDI FOCUS The Role of Capital Structure in Real Estate Project Financing: Risk, Cost, and Policy Implications

By examining project-level data on real estate project financing (PF), I find that higher equity ratios are associated with lower overall risk and reduced project costs. This finding supports policy measures aimed at strengthening capital structures without unduly constraining PF activity. If regulatory lending limits are to be introduced, they should target only low-equity PF projects. Moreover, preferred shares should be recognized as regulatory-eligible equity capital, and the deferral of capital gains tax should be made permanent to encourage in-kind land contributions. It is equally important to address regulatory arbitrage involving Project Finance Vehicles (PFVs), which are often exploited to pursue large-scale developments with minimal capital.

- The government has announced measures to expand PF equity capital, but without disclosing project-level data, there is no empirical basis to assess whether this expansion sufficiently reduces risk.

- Empirical analysis finds that expanding PF equity capital lowers risks across presale, default, postdefault recovery failure, and post-completion refinancing failure.

- PF capital expansion reduces construction, f inancing, and other costs, which in turn lowers total project costs.

- Increases in PF equity ratios diminish contractors’ guarantee risk, reduce construction costs, and thereby lessen completion risk.

- The current plan properly combines capital requirements with incentives, but specificity and effectiveness should be improved.

- PF lending caps should apply only to loans on low-equity projects, not to all PF loans.

- Policy incentives should extend to preferred shares as eligible PF equity capital to attract more equity investors.

- The capital gains tax deferral for in-kind land contributions should be permanent.

- PFVs have enabled undercapitalization in large projects, and prudential regulation and supervision on par with project REITs should be introduced in stages for PFVs to close regulatory arbitrage and strengthen the capital base.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.10

■	The Korean economy continued to show weak growth in overall production, weighed by contraction in the construction sector, while weakness in consumption appears to be easing

	○	The prolonged downturn in the construction sector continues to weigh on all-industry production growth, while employment also slowed, particularly in that sector.

	○	However, manufacturing indicators improved, as continued high growth in passenger car retail sales is driving a surge in motor vehicle output.

	-	Other retail sales also showed a gradual easing of weakness,supported by declining market interest rates and government consumption support measures.

	○	Meanwhile, downside risks to economic activity persist, as indicated by deteriorating global trade conditions.

	-	High tariffs on Korean motor vehicle exports to the U.S. remained in place, while trade uncertainty has increased, as indicated by renewed tensions between the U.S. and China.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, August 2025

Contract Type Selection in Korea’s Large-Scale Retail Sector / JINKOOK LEE, Myeongsik Seo

“Using firm-level data on 7,000 suppliers transacting with 26 major South Korean retailers, this study analyzes how contract types, referring to direct purchase, special contract, consignment, and store lease types, are determined and how they affect supplier performance. Contract choice varies systematically by retail format and product category, shaped by transaction costs and asset specificity. Regression results show that direct purchases are positively associated with advanced retailer procurement systems, high supplier trust in the retailer, and stronger supplier bargaining power, while special contracts are more prevalent when supplier-specific investments are required. Instrumental variable estimates indicate that a 1 percentage point increase in the special contract share reduces supplier revenue by approximately KRW 259 million. Regulatory enforcement data reveal that over 75% of unfair trade practices occur in direct and special contract transactions, with special contracts showing the highest violation rate per transaction. These findings suggest that contract type is a key channel through which bargaining asymmetries affect economic outcomes. Policy implications include enhancing supplier bargaining power and improving the oversight of contract-specific risks.”

On the Effects of National Debt on the Distribution of Household Assets / SEUNG-RYONG SHIN

This study examines the long-term effects of higher national debt in South Korea on asset distribution. Using an overlapping generations general equilibrium model, we focus on two key channels: rising interest rates and falling wage rates, both driven by the crowding-out effect of capital. Higher interest rates increase asset dispersion, benefiting older groups with more accumulated assets, while younger groups with fewer assets gain less. Falling wage rates reduce the capacity to save money across all age groups, partially offsetting the dispersion effects of higher interest rates. A simulation of a 50% increase in national debt reveals a decline in the Gini coefficient of asset holdings, driven by the diminishing marginal increase in future assets relative to current holdings. However, widening cross-sectional dispersion proved more welfare-relevant: older age groups, which experienced greater gains in average assets, saw increases in average welfare, whereas early life-cycle cohorts with low asset levels experienced welfare losses. Given this trade-off associated with higher national debt, initial asset transfers as a counteracting measure can enhance lifetime welfare overall, mitigate the rising asset dispersion, and improve the asset Gini coefficient.

The Macroeconomic Effects of Structural Oil Price Shocks: An International GVAR Analysis / SORA CHON

This paper investigates the macroeconomic impacts of structural oil price shocks by employing a Global Vector Autoregression (GVAR) framework, utilizing the structural shocks as identified by Baumeister and Hamilton (2019). Our analysis differentiates among three types of oil shocks: economic activity shocks caused by fluctuations in global demand, oil supply shocks driven by production disruptions, and oil inventory demand shocks linked to shifts in market expectations about future supply-demand imbalances. Empirical findings indicate that the macroeconomic consequences of these shocks differ depending on their underlying sources and related structural characteristics. In oil-importing countries such as Korea and China, oil supply disruptions and inventory-related shocks generally exert negative short-term effects on economic activity due to increased import costs and uncertainty-driven price volatility. Conversely, oil-exporting countries such as Canada and the United States respond differently, benefiting from increased export opportunities associated with higher oil prices. Overall, the study emphasizes the critical importance of distinguishing the structural causes of oil price fluctuations, highlighting how the indirect transmission of these shocks through international economic linkages significantly influences domestic macroeconomic performance outcomes. The results provide important implications for policymakers, underscoring the necessity of tailored policy responses to mitigate macroeconomic risks arising from energy transitions and geopolitical uncertainties.

Efficiency Effects of Regulations on Unfair Subcontracting Behaviors / YONG HYEON YANG

This paper investigates the efficiency effects of governing vertical relationships by analyzing the incentives of firms to engage in exclusive contracts. In particular, the analysis focuses on the subcontracting context. When a downstream firm possesses a superior bargaining position, upstream subcontractors do not prefer an exclusive contract, even when it is efficient, as such a contract lowers their bargaining power even further, ultimately leading to lower profits. It can therefore enhance efficiency to encourage upstream firms to engage in an exclusive contract by limiting bargaining power abuses by superior downstream firms. The paper discusses the required flexibility of such a regulation as well as the evaluation of the current regulation based on the analysis.

Sharing Economic Rents with Workers? Evidence from Matched Employer-Employee Data in Vietnam / NOBUAKI YAMASHITA

Utilising matched employer-employee data from Vietnamese small and medium enterprises (SMEs) surveys spanning the time frame of 2007-2015, we investigate the extent to which firms share economic rents with their employees through wage adjustments. Our analysis reveals rent-sharing elasticity of 0.08-0.1, demonstrating that small firms with limited market power engage in rent sharing in response to increased economic rents, measured as value added per employee. This rent sharing is prominent if a worker is related to an owner and is engaged in non-production jobs. However, the analysis based on worker panel data indicates caution against interpreting the results as causal evidence.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 9

■	The Korean economy, despite weak construction investment, is showing some easing of overall sluggishness, led by consumption.

	○	Construction investment remains sluggish, while equipment investment growth is moderating, with manufacturing capacity utilization still at low levels.

	○	However, the weakness in consumption is slightly easing as market interest rates continue to decline and government consumption support policies are implemented.

	○	Downward pressures on exports remain elevated, reflecting persistently high U.S. tariffs and heightened global trade uncertainty.

	-	Exports continue gradual growth led by semiconductors, but with tariff hike effects starting to emerge, including declining shipments to the U.S., earlier front-loading may unwind, potentially slowing export growth.

	-	Uncertainty also lingers over the possibility of tariffs on semiconductors

Summary

Policy Study KOR Investor Composition of Government Debtand its Fiscal Implications

This paper estimates the demand for South Korea’s government bonds across investor categories and projects future bond yields in light of the country’s rising debt trajectory. A cross-country analysis shows that public and non-bank sectors have been key drivers of increased foreign investor holdings of Korean government debt during the COVID-19 pandemic. Using sectoral debt holdings data, the paper examines the evolution of marginal holdings of government bonds by each sector and estimates the responsiveness of debt demand to bond yield changes. Over the past decade, domestic banks and public institutions, including the National Pension Service, have reduced their marginal holdings, while private pension and investment fund sectors have increased theirs. These findings highlight the growing importance of non-bank sectors in government debt demand, consistent with the literature (Fang et al., 2022). Foreign investors exhibit the highest demand sensitivity to bond yields, whereas domestic insurance companies show the lowest. Based on sectoral demand estimates, a 10% increase in government debt is estimated to raise bond yields by 43 basis points. By 2030, when Korea’s government debt is expected to reach 2,000 trillion won, bond yields are projected to rise to 4.85%, ceteris paribus. Notably, 60% of the projected yield increase is attributed to the inelastic demand of insurance companies. This underscores the importance of adjusting the investor composition of the government bond market, with a greater share of investors with higher demand elasticity to alleviate pressure on borrowing cost.

Summary

Policy Study KOR Inflation Dynamics and Monetary Policy in an Aging Society: Insights from Consumption Patterns

South Korea, among the world’s fastest-aging nations, is projected to enter a super-aged society ― over 20% of the population aged 65 or older ― by 2025. Age-driven shifts in consumption patterns may significantly affect monetary policy effectiveness. This study analyzes the impact of age-specific consumption patterns on inflation and monetary policy outcomes, deriving policy implications.

Using consumption baskets, this study compares spending patterns across youth (15-34), middle-aged (35-64), and elderly (65+) cohorts. Findings reveal distinct consumption items by age group, with varying price rigidities. The elderly cohort primarily consumes items with frequent price fluctuations, suggesting a high likelihood of greater sensitivity to monetary policy changes.

Employing Jorda's (2005) local projection method, the study finds that tight monetary policy triggers a larger inflation decline among the elderly cohort than among the youth or middle-aged cohorts, reflecting the higher price flexibility of their consumption items.

These findings suggest that aging may diminish monetary policy’s impact on real consumption. To achieve policy objectives, the central bank must design policies that precisely reflect age-specific consumption patterns and price rigidities, with particular attention to the elderly’s consumption structure. In a rapidly aging society, detailed analysis of age-driven inflation responses and tailored policy measures are essential for monetary policy efficacy.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025. 8

■	The Korean economy continues to record low production growth, weighed down by sluggishness in the construction sector, although consumption conditions have shown partial improvement.

	○	Construction investment continued to decline significantly, and growth in equipment investment is also experiencing adjustment.

	○	Nevertheless, consumption conditions are improving, supported bya continued decline in market interest rates and consumption stimulus measures.

	○	While trade uncertainty has eased following the conclusion of trade negotiations between the U.S. and major economies, high tariffs continue to weigh on exports.

	-	While export growth has remained modest, the risk of a slowdown is considered elevated, as the front-loaded effect―mainly in semiconductors―diminishes and the impact of tariff hikes begins to materialize (see Box, p.8).

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