Strengthening the Monetary Policy Framework in Korea

Author/Editor:

Kevin Clinton ; R. S Craig ; Douglas Laxton ; Hou Wang

Publication Date:

May 10, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank’s mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

Series:

Working Paper No. 19/103

Subject:

English

Publication Date:

May 10, 2019

ISBN/ISSN:

9781498312226/1018-5941

Stock No:

WPIEA2019103

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

28

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