Household debt poses a serious risk to the Korean economy. Advanced economies have shown for the past 130 years that an excessive growth of private loans leads to longer and more severe recessions. The significance of financial stability has become widely recognized since the
Household debt poses a serious risk to the Korean economy. Advanced economies have shown for the past 130 years that an excessive growth of private loans leads to longer and more severe recessions. The significance of financial stability has become widely recognized since the global financial crisis, and has led many countries to strengthen their macro-prudential management to avoid excessive loan-taking. After the global financial crisis, the majority of OECD countries adjusted their household debt ratios. In Korea, however, household debt has doubled in size, despite the countless warnings and government actions, and the risks are snowballing. So, why have past policies failed to contain the situation? Macro-prudential policies can enhance social welfare through financial stability, but this requires a long-term effort. And because the policies restrict excessive amount of loans to reduce the risks of financial instability, it is difficult to gain public support during recessionary periods when production and employment are low. They also generate resistance from interest groups due to their impact on the loan and real estate markets. It may be theoretically shown that, the more policy makers are fixated on the short-term outcomes, the more likely they are to choose stimulus packages that entail excessive debt, despite their concerns over financial instability.