Korea’s money supply-to-GDP ratio tops more than double the U.S. level… “Excess liquidity stoking the exchange rate”
공유하기
Summary
- It reported that Korea’s M2-to-GDP ratio is 2.2 times the U.S. level, prompting criticism that excess liquidity is stoking the exchange rate.
- While some experts pointed to accommodative fiscal and monetary policy and M2 growth as key drivers of the recent weak won, the Bank of Korea countered that the impact of money supply on the exchange rate is limited.
- The Bank of Korea said the recent uptrend in the exchange rate stems from supply-demand factors such as net FX outflows, a growth gap, and a gap in expected stock-market returns.
‘Money supply–weak won’ debate flares again
BOK: “Driven by supply-demand factors more than money supply”
Rebuttal: “Net FX outflows up 39-fold last year”
South Korea’s ratio of broad money (M2) to gross domestic product (GDP) was found to be 2.2 times that of the United States. Critics argue that liquidity unleashed into the market through expansionary fiscal policy and the like is pushing up the exchange rate.
According to data Rep. Park Sung-hoon of the People Power Party received from the Bank of Korea (BOK) on the 14th, Korea’s M2-to-GDP ratio stood at 153.8% in the third quarter of last year, 2.2 times higher than the U.S. level (71.4%). Korea’s M2-to-GDP ratio has been on a steady upward trend since topping 100% in the third quarter of 2008, during the global financial crisis, when it reached 100.1%. After setting a new high of 157.8% in the first quarter of 2023, it fell to 151.6% in the fourth quarter the following year before rebounding last year. In the U.S., the ratio surged from the 60% range just before COVID-19 to 90.9% in the second quarter of 2020, then slipped below 80% after the fourth quarter of 2022.
Korea’s figure is also higher than that of other major economies. The euro area’s M3-to-GDP ratio in the third quarter of last year was tallied at 108.5%. It jumped to 126.7% in the first quarter of 2021 but has trended down since, falling below 110% starting in the first quarter of last year. The euro area expresses broad money as M3, which includes longer-maturity financial products.
Some experts cite Korea’s M2 growth—driven by accommodative fiscal and monetary policy—as a key factor behind the recent weak won. The People Power Party is turning expansionary fiscal and monetary easing policies into a political issue, arguing that the government is “pumping money that only erodes the value of the won” (Park Sung-hoon, chief spokesperson). The BOK, which oversees monetary policy, counters that “the impact of money supply on the exchange rate is limited.” In particular, it stressed that M2-to-GDP ratios cannot be compared directly because of differences in financial systems. A BOK official explained, “In Korea, liquidity is created mainly through banks and is included in M2, whereas in the U.S. funds are supplied through corporate bond issuance and the like, so there is substantial liquidity outside M2.” Indeed, Japan (reported as M3), whose financial market is relatively similar to Korea’s, posted a ratio of 243.3% in the third quarter of last year—higher than Korea and other countries.
The BOK views the recent rise in the exchange rate as being driven more by supply-demand factors than by money supply. Kwon Yong-oh, head of the BOK’s International Finance Research Team, said at a “Joint FX Market Policy Symposium” that “there is a close relationship between changes in exchange-rate trends and shifts in FX supply and demand since the global financial crisis,” adding that “net outflows of foreign currency due to overseas investment and the like totaled $19.6 billion from January to October last year.” Over the same period in 2024, net outflows were only $0.5 billion. A widening growth gap between Korea and the U.S., along with a gap in expected stock-market returns, was also cited as factors behind the recent rise in the exchange rate.
By Kang Jin-kyu josep@hankyung.com
