Is local currency an effective method for transfer payments in the South Korean economy?

Abstract

This paper explores the impact and effectiveness of the local currency as a transfer payment tool in South Korea, especially during the COVID-19 pandemic. Introduced by the Korean government as an alternative to national currency and cash transfer payments, local currency seeks to stimulate local economies through the reduction of offshore outflow of funds. The study uses the game theory and Nash equilibrium concept to demonstrate that the use of local currencies in areas outside Greater Seoul is a dominant strategy in terms of welfare improvement. The multiplier effect is also applied to compare cash transfers with local currency transfers and in-kind transfers. The result that can be seen is that local currency transfer has a higher net local economic effect and in-kind transfer only benefits under certain conditions. This paper, therefore, concludes that local currency transfers are more viable tools for local economic revitalisation in support of small businesses and the alleviation of negative impacts brought about by offshore consumption. It also points to the strategic communication between local governments to maximise the benefits accruable from the local currency and reduce inefficiencies.