Strengthening the Monetary Policy Framework in Korea
IMF Working Papers, May 10, 2019
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- Strengthening the Monetary Policy Framework in Korea
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Bibliographic details
- Authors: Kevin Clinton, R. S Craig, Douglas Laxton, Hou Wang
- Published: May 10, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498312226.001
Background and motivation
- Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation.
- 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.
- The central bank’s mandate became more complex with the addition of financial stability.
Key findings and analysis
- Monetary policy effectiveness has been undermined by prolonged below-target inflation and a broader mandate that includes financial stability.
- A macro model calibrated to Korea can be used to simulate policy and provide a medium-term focus on achieving the inflation target.
- Enhanced communication, supported by a forecasting and policy analysis system, can improve the Bank of Korea’s ability to achieve its inflation objective over the medium term.
Policy recommendations
- Two-pronged approach:
- Enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system.
- Clarify the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target.
- Use model-based simulation and forecasting to strengthen medium-term focus and public communication around the inflation target.
Simulation and tools
- Simulation of a macro model calibrated to Korea illustrates how model-based analysis can:
- Provide greater medium-term focus on achieving the inflation target.
- Strengthen communication of policy intentions and expected paths.
Subject coverage and keywords
- Subjects: Central bank policy rate; Financial sector policy and analysis; Financial sector stability; Financial services; Inflation; Inflation targeting; Monetary policy; Output gap; Prices; Production.
- Keywords: Central bank policy rate; Financial sector stability; GFC monetary policy; Global; Inflation; inflation targeting; inflation targeting performance; Korea; monetary policy; monetary policy decision; monetary policy effectiveness; Output gap; output gap equation; policy rate; policy reaction; quadratic monetary policy reaction function; rate; rate cut; reaction function; WP.
Source: "Strengthening the Monetary Policy Framework in Korea", Kevin Clinton; R. S Craig; Douglas Laxton; Hou Wang; May 10, 2019 (IMF Working Papers 2019, 103).
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