A change in US monetary policy has relatively little impact on commodity-importing countries, like South Korea, a report said Monday.
According to the report published by the Bank of Korea, when the US Federal Reserve raises its policy rate, the world’s largest economy witnesses a contraction in demand for crude oil and other raw materials.
The decreased US demand pushes down international commodity prices, which consequently leads to a decline in exports by resource-rich countries.
At the same time, commodity-importing countries suffer from sluggish US demand through contracted consumption and investment, but the impact is smaller than that felt by exporters.
In case of a rate fall, the process works the opposite way, boosting US demand and oil prices.
“In response to the (US monetary) shock, commodity prices drop and exports of commodity-exporting countries go down by more than a production decrease of commodity-importing countries,”
author Kim Myung-hyun, an economist at the BOK, said.
If the exporting countries have exchange rate systems pegged to the US dollar, the report said a rate increase by the US Fed brings about a bigger impact on those economies. They have to raise their own interest rate further to deal with the fluctuation of their currency triggered by higher US interest rate.
The report said importers with the floating currency system seems to be rarely affected by the US monetary tightening.
“South Korea is a net importer of commodities, such as crude oil, and employs the floating rate system,” Kim said. “A change in US monetary policy has little impact on the South Korean economy.” (Yonhap)