Contents

Monetary Policy During and After the Crisis in Korea

Cho, Dong Chul(Author)

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Abstract

This paper discusses Korea’s post-crisis monetary policy, focusing on two questions: (i) whether the high interest rate policy right after the outbreak of crisis was effective on exchange rate stabilization and (ii) whether the post-crisis interest rate policy can be justified in light of the optimal monetary policy rule framework. In the first part, this paper presents a theoretical framework that explains how a temporarily high interest rate policy can stabilize the depreciating exchange rate through either signaling effect or unanticipated monetary shock. As for empirical evidence, the paper summarizes the existing literature showing that the results are still inconclusive, but if there is any country in Asia where the policy was effective, it is likely to be Korea. Then the paper discusses conjectures that can explain this result for Korea. In the second part, this paper discusses monetary policy objectives and implied interest rate policy rules, and how to understand the post-crisis interest rate policy of Korea by comparing calibration results of such policy rules with the actual interest rate policy. The high interest rate policy in 1998 can be justified only when the actual (year-on-year) inflation rates as opposed to expected inflation rates were used. In contrast, the low interest rate policy since 1999 can be justified only when GDP deflator as opposed to Core CPI was used. Then the paper criticizes the actual year-on-year inflation rate as an inflation index for the monetary policy, and argues that the high interest rate policy appears hard to be justified from the second quarter of 1998.

Issue Date
2003-05
Publisher
Korea Development Institute
Subjects
Inflation; Interest Rates; Monetary Policy
Contents
Foreward

Summary

I. Introduction

II. The High Interest Rate Policy
 2.1 Theoretical Underpinnings
 2.2 Empirical Findings

III. Monetary Policy and Standard Policy Objectives
 3.1 Policy Objectives and the Optimal Policy Rule
 3.2 Calibration
 3.3 Results and Discussion

IV. Summary and Conclusions

Reference
Pages
30
Series Title
KDI Policy Study 2003-01
URI
https://archives.kdischool.ac.kr/handle/11125/41822
DOI
10.22740/kdi.ps.e.2003.01
ISBN
89-8063-165-0
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