Assessment of Deflation Risk in Korea (in Korean)

Due to the global financial crisis, the inflation in major countries such as U.S., Europe and Japan is on the decline and some agencies forecast the expected inflation in major countries to be in a negative territory. These phenomena are exacerbating the concerns about deflation risk. If deflation, which is generally perceived as long run economic recession, become widely contagious, such deflation could severely affect financial markets and might serve as a factor seriously rattling economic entities' confidence about market conditions. Recently, with the growing concerns that economy would be deteriorated more than expected, some are raising the possibility of deflation. On a basis of annual average changes, inflation(consumer price basis) has never been recorded to be minus since 1966. However, if the global economic downturn deepens and persists in a long run, it is difficult to deny the possibility that, starting largely in some commodities, inflation would sharply slow down. This study strives to assess the risk of deflation in Korea by calculating it into concrete figures based on the methodology used by the International Monetary Fund, and other econometric analyses. On the end of 2008 basis, the risk of deflation in Korea is evaluated by using a variety of methodology such as IMF Vulnerability Index and the distributional characteristics of price changes. The results show the possibility of deflation is extremely slim. Furthermore, according to the analysis of both the upside and downside risk probabilities about the occurrence of inflation in 2009, former seems greater than the latter.