Issue Korea: fiscal strain and bond market turmoil abroad may transmit through rates, the won and capital flows

Summary

The report expects fiscal burdens and bond market instability in major economies to reach Korea through interest rates, the exchange rate and capital flow volatility. If long-term yields in the United States and other major economies become sticky on the downside amid high debt and high rates, the easing of global financial conditions would be delayed. That would also narrow the room Korea has to run its own macroeconomic policy. If bond market instability spreads into risk aversion, a stronger dollar and capital outflow pressure on emerging markets, the stable capital inflows and currency cushions Korea has enjoyed could change. The report treats this channel as one strand of a combined risk rather than a stand-alone cyclical shock.