Research indicates that households with repeated experiences of currency surges tend to reduce their consumption less in response to rising exchange rates.
According to a report released on October 1 by the Bank of Korea, households that have faced multiple currency surges in the past show a tendency to maintain consumption levels even at higher exchange rates.
Typically, when exchange rates rise, import prices increase, leading to a decline in real purchasing power and a contraction in household consumption. This study highlights the possibility that repeated experiences of currency surges have altered consumption behaviors.
During the 1997 financial crisis, household consumption plummeted and did not recover for five quarters following the shock. The consumer sentiment index also remained below the baseline of 100 during that period. However, in subsequent major currency surges, consumer sentiment showed a temporary decline followed by a relatively quick recovery.
The study found that the negative impact of rising exchange rates on consumption is limited for households with extensive experience of currency surges. The Bank of Korea suggested that households may have learned to adapt their consumption strategies in response to repeated shocks, managing the impact of purchasing power fluctuations as a manageable risk.
Choi, a research fellow, noted, "Although the exchange rate recently reached the 1,500 won level, household consumption did not plummet or significantly contract. This is likely a result of policy efforts to buffer against exchange rate fluctuations since the financial crisis, along with economic adjustments that have allowed households to adapt to currency surges."
There were notable generational differences in the effects of currency surges on consumption. For Generation X, the impact of currency surges during high exchange rate periods was statistically significant, while for the MZ generation, the effect was negative.
The Bank of Korea interpreted this as Generation X having formed adaptive consumption behaviors through repeated experiences of high exchange rates during their participation in the labor market and asset accumulation after the financial crisis. In contrast, the MZ generation may have had limited opportunities to learn adaptive strategies due to their shorter exposure to significant currency increases.
Among households with varying financial conditions, those with smaller asset sizes or higher debt service ratios (DSR) exhibited more pronounced adaptive consumption behaviors. This was particularly evident in discretionary spending rather than in essential goods, especially in communication expenses.
However, the study acknowledged limitations, noting that other economic shocks, such as rising unemployment and income declines, often accompany currency surges. While several factors were controlled, it remains challenging to completely isolate the effects of currency surge experiences from broader economic crises.
In the report, Choi emphasized, "Policies should not only focus on short-term shock mitigation but also enhance predictability to support household adaptation, ensuring that consumption disparities between different socioeconomic groups do not widen during the adaptation process."
* This article has been translated by AI.
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