Generation X with More Experience of Exchange Rate Surges Reduces Consumption Less Than Millennials and Gen Z

BOK Economic Research: An Analysis of the Relationship Between Experience of Exchange Rate Surges and Household Consumption

Choi Youngjun, BOK Research Fellow: "Need to Examine Consumption Gaps Between Social Groups"

A study by the Bank of Korea found that the more often households have experienced rapid surges in the exchange rate, the less pronounced the negative impact of such currency spikes is on household consumption. The bank explained that repeated experiences with steep exchange rate hikes allow households to adapt to relatively high currency levels.

On October 1, Choi Youngjun, Research Fellow at the Macroeconomic Research Team of the Economic Research Institute at the Bank of Korea, stated in a report titled "BOK Economic Research: Analyzing the Relationship Between Experiences of Rapid Currency Appreciation and Household Consumption" that, "Since the foreign exchange crisis, household spending has been observed to contract less severely during episodes of sharp currency appreciation than it did previously, which contrasts with earlier studies suggesting that a rise in the won-dollar exchange rate suppresses household consumption by reducing real income."

Choi analyzed data from the Korea Labor and Income Panel Study (KLIPS) from 1998 to 2024 to assess how prior experiences with sudden exchange rate increases are related to the mitigation of consumption declines. The analysis weighted both the age of the head of household and the timing of the exchange rate shocks, assigning greater emphasis to more recent experiences and periods of sharp currency appreciation.

This study also classified periods of sharp currency appreciation as follows: the 1997 foreign exchange crisis (a 41.7% rise), the 2001 IT bubble burst (a 14.2% rise), the 2008 global financial crisis (an 18.7% rise), the COVID-19 pandemic period from 2020 to 2022 (a 12.9% rise over two years), and the subsequent upward trend after 2022, excluding periods before the 1990s.

Following the 1997 exchange rate surge, household consumption and the consumer sentiment index both dropped sharply and recovered only slowly; however, during later instances of currency spikes, recovery occurred more quickly than at the time of the 1997 crisis.

This adaptive consumption pattern was more evident with discretionary goods, such as telecommunications expenses, than with basic necessities. Unlike basic necessities, expenditures and timing for discretionary items can be adjusted, suggesting that consumers have adopted coping mechanisms learned from previous episodes of exchange rate volatility.

There were also generational differences in how consumption was affected. For Generation X (born from 1970 to 1980), exchange rate surges were associated with a significant positive effect on consumption, whereas for Millennials & Gen Z (born from 1985 to 2000), the effect was negative.

Choi explained that Generation X, who began their economic activity around the time of the 1997 foreign exchange crisis and thus have more experience with rapid currency fluctuations, experienced only limited reductions in consumption during such periods; in contrast, Millennials & Gen Z—who have less experience with such events—were more likely to cut back their spending.

By asset size, the pattern was more pronounced among households with smaller asset holdings or higher debt service ratios (DSR). Households with fewer assets or greater debt have a diminished capacity to absorb exchange rate shocks, leading to tighter constraints on their spending.

Choi added, "Through repeated exposure to periods of sharp currency appreciation, households may have learned how to cope with shocks to their purchasing power and may now perceive such shocks as manageable risks." He emphasized, "Policymakers should closely monitor the relationship between changes in currency levels and consumer behavior across different household types, and develop policy responses to prevent widening consumption gaps between social strata during the adaptation process."

This content was produced with the assistance of AI translation services.