Strengthening the Monetary Policy Framework in Korea

By Kevin Clinton, R. S Craig, Douglas Laxton, Hou Wang

May 10, 2019

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Format: Chicago

Kevin Clinton, R. S Craig, Douglas Laxton, and Hou Wang. Strengthening the Monetary Policy Framework in Korea, (USA: International Monetary Fund, 2019) accessed September 20, 2024

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.

Subject: 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

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/103
Stock No:

WPIEA2019103
ISBN:

9781498312226
ISSN:

1018-5941

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