Optimal Macroprudential Policy for Korean Economy
Seoul Journal of Economics 28 (No. 2 2015): 119-142
24 Pages Posted: 30 Jun 2015
Date Written: May 29, 2015
Fujimoto et al. (2014) set up a model with financial frictions through search and matching between firms and banks in the loan market. They also show that optimal policy criteria in the model include terms of credit variables. In this paper, we calibrate the model of Fujimoto et al. (2014) for South Korea and investigate the simple and optimal monetary and macroprudential policy rules that include credit variables in addition to the consumption gap and inflation rate as explanatory variables. We compare the performances of a standard Taylor rule and these optimal rules. Numerical simulations show that the simple macroprudential and monetary policy rules with credit terms can induce higher welfare than the estimated Taylor rule for the Korean economy. Simultaneously, simple macro-prudential and monetary policy rules with credit terms do not always improve welfare.
Keywords: Optimal macroprudential policy, Financial market friction
JEL Classification: E44, E52, E61
Suggested Citation: Suggested Citation