Title : The Credit-Driven Business Cycles in South Korea: How Important is the Credit Supply Channel?

Author : Nam Gang Lee(Korea Investment & Securities Co.), Seungho Nah(Bank of Korea)

This study analyzes the dynamics between credit (household debt) and economic growth in South Korea from 2000 to 2020. We show that they empirically have an intertemporal trade-off relationship, as previous cross-country studies suggest. We employ the three-stage least squares method to demonstrate that the credit supply channel primarily mediates the relationship. Our findings indicate that in the loan market, where banks have the incentive to oversupply, changes in the lending attitude of banks due to macroprudential regulations imposed by policy authorities concerned with excessive credit movement explain a substantial portion of household debt fluctuations and the resulting economic activity. This channel – the so-called “credit supply channel” – accounts for 72% of the growth rate sensitivity over the next two years to the household debt ratio.