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Effects of Rising Base Rates on Major Manufacturing Industries and Policymaking

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Soaring inflationary pressure and the ripple effects of the base rate spikes by the US Federal Reserve are expected to lead the Bank of Korea (BOK) to raise its base rate at least three times during the remainder of 2022. Korean firms rely primarily on indirect financing for their financial needs as the Korean capital market is strongly bank-based. However, small and medium-sized enterprises (SMEs) are far more dependent than large corporations on indirect financing. Monetary policy changes involving interest rates therefore exert a significantly greater impact on SMEs than they do on large corporations, and changes in monetary policy are estimated to transfer greater costs onto SMEs than onto large corporations. Whether in the short term or the long term, the burden of rising interest rates faced by SMEs is greater than that faced by large corporations. Low liquidity, high inflation rates, negative consumer sentiment, and excessive outstanding debt all threaten to increase risks to Korean capital markets today. Industries dominated by SMEs are expected to see their interest coverage ratios drop significantly and the percentage of zombie firms grow amid rising interest rates. This paper identifies the proactive policy action necessary needed to minimize the repercussions of rising base rates on industries where SMEs are concentrated.

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  • Kim, Hyun Seok, 2022. "Effects of Rising Base Rates on Major Manufacturing Industries and Policymaking," i-KIET Issues and Analysis 22/1, Korea Institute for Industrial Economics and Trade.
    • Handle: RePEc:ris:kietia:2022_001
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    Keywords

    capital markets; interest rates; monetary policy; Korea; base rate; small and medium-sized enterprises; SMEs; zombie firms; zombies; inflation; consumer sentiment; debt; financing;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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