## What's in the R- Stars for Korea?

_IMF Working Papers, March 26, 2021_

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## Bibliographic details
- Authors: Sohrab Rafiq
- Published: March 26, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513575223.001

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### Executive summary
- Korea’s real neutral rate (r-star) has declined significantly in recent decades and is currently below zero.
- The decline reflects a significant decline in trend growth and two large financial crises that triggered significant shifts in the saving-investment balance.
- Larger fiscal deficits and frothy financial conditions since 2012 have helped offset rising demand for safer assets, preventing the neutral rate from falling further.
- The fall in the neutral rate, and its effects on asset returns, has complicated the task of monetary policy stabilization.
- Korea’s neutral rate is likely to remain low over the medium-term and could fall further due to structural factors and demographic rotation.
- The COVID pandemic risks magnifying these trends.

### Key findings and drivers
- Trend growth: A significant decline in trend growth is a primary driver of the fall in the neutral rate.
- Financial crises: Two large financial crises produced significant shifts in the saving-investment balance contributing to lower r-star.
- Demand for safe assets: Rising demand for safer assets has put downward pressure on r-star; this was partially offset by larger fiscal deficits and frothy financial conditions since 2012.
- Structural savings-investment imbalance: Declining productivity and demographic rotation increase demand for precautionary saving and convenience yield, and contribute to widening capital risk premia.

### Macroeconomic implications
- Monetary policy: A lower neutral rate complicates monetary policy stabilization through its effects on asset returns and the equilibrium real interest rate.
- Medium-term outlook: Korea’s neutral rate is projected to remain low over the medium-term and could decline further if structural and demographic trends persist.
- Risk amplification: The COVID pandemic may magnify the trends lowering r-star.

### Subject tags and topical scope
- Financial crises; Financial services; Inflation; National accounts; Output gap; Prices; Production; Real interest rates; Return on investment.
- Keywords highlighted in the source: author's email; Convenience; Demographics; Global; Inflation; Korea rate expectations decomposition; Neutral Rate; Output gap; Real interest rates; real rate of interest; Return on investment; Risk Premia; Savings; savings-investment imbalance.

*Sohrab Rafiq. "What's in the R- Stars for Korea?", IMF Working Papers 2021, 093 (2021), accessed 9/16/2026, https://doi.org/10.5089/9781513575223.001*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/03/26/what-is-in-the-r-stars-for-korea-50262_