Can the Public Carry Trade Restore Fiscal Sustainability? Evidence from Korea's Consolidated Balance Sheet

YiLi Chien, Hyungsuk Lee and Junsang Lee

No 2026-020, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Can governments use a carry-trade strategy to offset the fiscal costs of population aging? We examine this question through the consolidated balance sheet of Korea’s public sector, combining the assets and liabilities of the government, public pension and investment funds, and the central bank. The consolidated balance sheet reveals increasing reliance on a carry trade in which risky, increasingly foreign assets are financed with safe, low-yielding domestic liabilities. This strategy has generated a favorable return spread and strengthened public net worth. However, present-value accounting shows that projected government and pension deficits substantially exceed the public sector’s accumulated financial wealth. A VAR-based simulation similarly indicates that persistent structural deficits eventually overwhelm the returns from public assets and drive consolidated net worth deeply negative. Financial repression can delay this deterioration but cannot restore fiscal sustainability; moreover, it shifts the cost disproportionately to less financially sophisticated depositors. Neither the carry trade nor financial repression can substitute for fiscal and pension reform.

Keywords: consolidated balance sheet; carry trade; financial repression; fiscal sustainability (search for similar items in EconPapers)
JEL-codes: E58 E62 E63 G11 G12 H63 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-08-29
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DOI: 10.20955/wp.2026.020

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