South Korea has become the fifth country in the world to have a large-scale semi-structural macroeconomic model. Using this model is expected to improve the efficiency of economic policies in the future as it can quickly reflect changes in domestic and external conditions.
The Macroeconomic Model Team at the Bank of Korea's Economic Model Division published a report on the development results of the 'Korean-style large-scale semi-structural macroeconomic model (BOK-LOOK)' on the 3rd. Co-authors of the report included Director Jeong Seung-ryeol, Director Kang Suk-il, and researchers Jo Hyung-bae and Yoon Jin-woon.
The semi-structural macroeconomic model refers to a model that reflects information derived from data, unlike structural models based solely on economic theory. It has the advantage of quickly reflecting changes in domestic and international economic and financial conditions. Consequently, central banks in major countries such as Canada, France, and the European Central Bank (ECB) have adopted semi-structural macroeconomic models. The Bank of England is also recently pushing for the development of a similar model.
BOK-LOOK follows the advantages of such semi-structural models while reflecting the unique characteristics of South Korea as a small open economy vulnerable to external changes. Specifically, it divides external trade partners into six blocks: the United States, China, Europe, and emerging Asia, reflecting a variety of trade channels. This allows for a more diverse analysis of domestic spillover effects when economic shocks occur in different countries.
The model also reflects the phenomenon of the synchronization of domestic and foreign long-term interest rates for the first time since the financial crisis. This enables analysis of the effects of changes in U.S. monetary policy and market interest rates on domestic financial conditions and the macroeconomy. For example, if the pace of U.S. policy interest rate cuts slows down, external demand decreases, leading to a reduction in South Korean exports and a decrease in GDP growth rate by 0.04 percentage points.
The model also includes variables for household debt ratios relative to housing prices and gross domestic product (GDP). According to the model, if the base interest rate is increased by 0.25 percentage points, housing prices drop by a maximum of 0.4%, and household debt decreases by approximately 5.1 trillion won. The household debt ratio relative to GDP is projected to decline by a maximum of 0.3 percentage points.
The Bank of Korea noted that "based on the stable economic outlook of BOK-LOOK, the model-based implicit interest rate (future policy interest rate trajectory) estimation system consistent with macroeconomic outlook paths has also been strengthened," adding that "this model will serve as a toolkit to improve the accuracy of conditional economic projections."