Households that have lived through repeated surges in the won-dollar exchange rate cut spending less when the currency weakens again, according to a Bank of Korea study. The adaptation effect was most pronounced among generations that experienced successive currency spikes after the 1997 Asian financial crisis, households with fewer assets and those carrying heavy debt-servicing burdens.
The study, titled "An Analysis of the Relationship Between Experience of Exchange Rate Surges and Household Consumption," was released on the 1st. Choi Young-joon, a research fellow at the Macroeconomic Research Division of the Bank of Korea's Economic Research Institute, examined 4,460 observations from the Korean Labor and Income Panel Study (KLIPS) covering 1998 through 2024 to assess how past exposure to currency shocks shapes current household spending.
Korean households have faced no shortage of such shocks. The average annual won-dollar rate jumped 47.1% to 1,398.9 won in 1998 from 951.1 won in 1997, the year the Asian financial crisis struck. The rate rose 14.2% from a year earlier in 2001, when the dot-com bubble burst, and climbed 18.7% in 2008 during the global financial crisis. In 2022, the won-dollar rate rose another 12.9%.
A weaker won typically pushes up import prices and erodes real purchasing power, prompting households to pull back on spending. That is what happened during the 1997 crisis, when household consumption contracted sharply after the currency spike. In later episodes, however, spending proved far less sensitive than it had been during the crisis.
The researcher attributed the shift to a learning effect. Households that have weathered multiple currency spikes have come to understand how a weaker won erodes purchasing power and how to respond, leaving them better adapted to the shock. The analysis found that the higher the current exchange rate, the smaller the relative decline in spending among households with more past exposure to currency surges.
Generational differences were clear. Members of Generation X, born between 1965 and 1980, tended to cut spending less during periods of a weak won the more currency spikes they had experienced. Those in the MZ generation, born between 1981 and 2010, reduced spending relatively more. The study suggested that Generation X may have developed spending habits suited to a weak won after living through the Asian financial crisis, the global financial crisis and other episodes firsthand. The MZ generation, by contrast, had less time exposed to large-scale currency shocks on the scale of the 1997 crisis, limiting their opportunity to adapt.
Patterns also diverged by asset and debt levels. Among households in the lower asset brackets, the adaptation effect from past currency spikes grew stronger as the exchange rate rose. No statistically clear effect emerged among households in the upper asset brackets.
The adaptation effect was also relatively strong among households with heavy debt-servicing burdens. It was most evident among the top 20% by debt service ratio, or households facing the largest principal and interest payments relative to income. For this group, the average marginal effect of past exposure to currency spikes on consumption was generally positive. The study said repeated currency shocks may have led these households to develop ways of adjusting spending to a persistently weaker won.
The adaptation effect did not appear uniformly across spending categories. It was relatively clear in discretionary items rather than necessities, and clearest of all in telecommunications costs. Vehicle maintenance costs also showed a widening adaptation effect as the exchange rate rose.
"The more experience households have with exchange rate surges, the more limited the negative impact of a rising exchange rate on their consumption," Choi said. "This suggests that as repeated experience of exchange rate surges accumulates, households may have formed spending behavior that responds to relatively high exchange rate levels."
