Decrease in the Household Savings Rate and the Effectiveness of Monetary Policy (in Korean)

Kyuil Chung ()
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Kyuil Chung: Institute for Monetary and Economic Research, The Bank of Korea

Economic Analysis (Quarterly), 2007, vol. 13, issue 2, 44-78

Abstract: Amid a sharp decline in the household savings rate after the currency crisis, the variability of private consumption has increased to a level exceeding the variability of GDP. Although there are various factors underlying the increase in the variability of private consumption, there is a likelihood that an increase in the number of simple consumption households without savings has a constant impact on it. The paper divides household into two groups, optimal households and simple consumption households, depending on whether the household has savings, and then analyzes what impact the increase in the ratio of simple consumption households has on the transmission lag and effectiveness of monetary policy, using Gali et al.(2004-a) According to the simulation, when the shock of a cut in the call rate occurs, the effect of consumption growth in the first quarter expands as the ratio of simple consumption household rises whereas the variability of aggregate consumption enlarges as the duration of shock response's effects becomes shorter. The result demonstrates that it is more effective for the central bank to respond positively to inflation rather than to economic conditions in alleviating the variability of macroeconomic variables, which results from the fact that the variability of consumption is relaxed if real wages are stabilized through price stability.

Keywords: Household Saving; Business Cycle; Monetary Policy (search for similar items in EconPapers)
JEL-codes: D10 E32 E52 (search for similar items in EconPapers)
Date: 2007
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