Central Bank: AI Boom Triggers K-Shaped Economy, Limiting Effectiveness of Interest Rate Tools from Three Aspects

(Central News Agency, reporter Pan Ziyu, Taipei, 5th) The AI boom has driven rapid growth in the high-tech industry, drawing attention to the "K-shaped economy" phenomenon. The Central Bank of Taiwan addressed this topic today, stating that under a K-shaped economy, relying solely on aggregate economic and financial indicators could mislead central bank decisions. Furthermore, it cannot rely only on interest rate tools and may need to be combined with more targeted policy measures.

The "K-shaped economy" describes an economic situation that diverges like the letter "K," where different groups, industries, or income classes experience vastly different economic outcomes. The wealthy class thrives (forming the upward stroke of the K), while the low-income class struggles (forming the downward stroke of the K).

The Central Bank posted on its Facebook fan page today to discuss the K-shaped economy issue, noting that during the initial outbreak of the COVID-19 pandemic in 2020, the K-shaped economy began to be used to describe the divergent recovery of different income classes and industries after the pandemic. Recently, the AI boom has once again sparked heated discussion about the K-shaped economy.

As the K-shaped economy issue is widely discussed, the Central Bank believes that traditionally, central banks rely on interest rate policy to influence the economy. However, under a K-shaped economy, relying solely on aggregate economic and financial indicators could mislead central bank decisions.

The Central Bank analyzed three major impacts of the K-shaped economy. First, the polarization of wealth and credit. High-income households benefit from booming financial markets and assets, stimulating consumer spending. Conversely, middle- and low-income households are hit harder by long-term inflation, eroding their savings and increasing their reliance on debt.

Second, mixed economic signals. Strong industry performance and wealth-driven spending may support arguments for raising interest rates to prevent inflation. At the same time, struggling working-class families mired in debt urgently need lower borrowing costs and economic support.

Third, asymmetry in the monetary policy transmission mechanism. When the central bank raises interest rates, high-income households, holding substantial financial assets, see increased interest income, which may offset the impact of higher borrowing costs, keeping their consumer demand strong. However, for middle- and low-income households that rely on wage income and carry heavy debt burdens, rate hikes increase their borrowing burden and reduce their real purchasing power.

The Central Bank stated that considering the above factors, when facing the K-shaped economy problem, it cannot rely solely on interest rate tools and may need to resort to targeted macroprudential policies.

In other words, when the economy shows a K-shaped divergence, raising or lowering interest rates may not solve all problems simultaneously. Therefore, the central bank may need to combine more precise policy tools. Taking Taiwan as an example, the selective credit controls imposed on the housing market in recent years can be seen as a case of targeted macroprudential measures, aimed at curbing specific market risks.

The Central Bank added that the Federal Reserve Bank of New York first published the Economic Heterogeneity Indicator in November 2022. Its purpose is to study macroeconomic trends and outcomes across different groups, geographic regions, businesses, and economic conditions, as well as their impact on the economy.

The Central Bank explained that traditional economic data often focuses on averages while ignoring structural issues. If economic growth relies too heavily on a single group, this imbalance could exacerbate macroeconomic fragility. Therefore, measuring differences in economic performance across different demographic characteristics, income classes, and regions through aspects such as inflation, income, employment, consumer spending, wealth, and business size is crucial for formulating effective monetary policy. (Editor: Pan Yijing) 1150605