Income Risk Sharing Between Korea and Its Regional Partners: Evidence from International Factor Income Flows

Abstract

This paper investigates the extent to which Korea shares income risk with its major regional partners through cross-border factor income flows. Using a dataset spanning 1998–2023, disaggregated by income type and partner region, we quantify Korea’s international income risk-sharing performance with eight global regions. Employing a bilateral income risk-sharing framework, we find that Korea achieves modest but statistically significant income smoothing through primary income inflows – particularly investment income – from Southeast Asia (SEA) and the European Union. Among income components, dividend receipts from SEA are the most effective in mitigating idiosyncratic output shocks. In contrast, primary income outflows – especially interest payments to the United States – amplify output volatility, leading to significant income dis-smoothing. These results highlight the heterogeneous nature of Korea’s financial linkages and underscore the importance of diversifying investment flows toward regions offering stronger countercyclical income, thereby enhancing macroeconomic resilience.