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October 28, 2009
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| Local economists yesterday called for a gradual raise in the base interest rate from 2 percent, the record low where the Bank of Korea has maintained it since March as part of its response to the economic downturn. Ahn Jae-wook, an economics professor at Kyung Hee University, said at a finance conference held by the Korea Economic Research Institute that keeping the low-rate policy too long could cause a worse crisis in the future. “The base rate needs to be raised gradually so as not to inflict a critical shock on the market,” said Ahn. Ahn said he based his argument on the business cycle theory of the Austrian School, which holds that too large a gap between the set interest rate and “natural” market preferences can lead to a recession. The professor said the U.S. subprime crunch that triggered the global crash was a solvency problem, caused by the combination of low government key interest rates and state intervention in the housing market. The U.S. and other governments, according to Ahn, mistook the downturn for a liquidity crisis, bailing out ailing companies and flooding the market with assets. Low interest rates and expansionary fiscal policies worsened the problem of excess liquidity, he said. “History teaches us continuing expansionary monetary and fiscal policies to boost the economy cannot succeed,” he said. Jeon Yong-deok, a Daegu University economics professor, and Kim Hak-soo, a Korea Economic Research Institute researcher, also said at the conference that it is difficult to sustain the economy using low rates. Another economist at the forum, Yoon Chang-hyun, a professor at the University of Seoul, argued that expansionary policies were the only way to ensure a recovery. “An exit strategy should be implemented only when it can be done prudently and cautiously under an international cooperative framework,” Yoon said. By Moon Gwang-lip [joe@joongang.co.kr] |
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