Monetary Policy Regime Change and Regional Inflation Dynamics: Looking Through the Lens of Sector-Level Data for Korea

49 Pages Posted: 28 Jul 2015 Last revised: 4 Sep 2015

See all articles by C. Y. Choi

C. Y. Choi

University of Texas at Arlington - College of Business Administration - Department of Economics

Joo Yong Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Roisin O'Sullivan

Smith College - Department of Economics

Date Written: July 24, 2015

Abstract

This paper explores the impact of the adoption of inflation targeting (IT) on the dynamics of city-level inflation in Korea using both aggregate and sector-level data. When looking at aggregate regional inflation, we find that the mean, volatility and persistence fell in all cities in the wake of the monetary policy regime change, consistent with other evidence in the literature. We also note a narrowing of the dispersion of regional inflation across cities and a greater degree of regional co-movement. Delving more deeply into the disaggregate data reveals additional insights however. For most of the changes we observe in the dynamics of regional inflation, we find that the aggregate effects are being driven primarily by sectors that fall into the ‘Services’ category. We posit that the impact of better anchored inflationary expectations is primarily on the less-traded services sectors of the economy, where the domestic monetary policy framework has a relatively larger influence compared with globally-traded commodities.

When it comes to the increased co-movement observed across regions under IT regime, however, it is the ‘Commodities’ sectors rather than ‘Services’ that are responsible, probably because services inflation becomes relatively more influenced by local factors once it has stabilized within the target range. We show that this sectoral heterogeneity can be explained by the difference in price stickiness such that sectors in which prices are adjusted less frequently tend to have a larger response under the new monetary policy regime.

Keywords: Regional inflation, Inflation targeting (IT), Inflation dynamics, Heterogeneity, Korean cities, Disaggregate CPI

JEL Classification: E31, E52, E58

Suggested Citation

Choi, Chi-Young and Lee, Joo Yong and O'Sullivan, Roisin, Monetary Policy Regime Change and Regional Inflation Dynamics: Looking Through the Lens of Sector-Level Data for Korea (July 24, 2015). Bank of Korea Working Paper No. 2015-20, Available at SSRN: https://ssrn.com/abstract=2636616 or http://dx.doi.org/10.2139/ssrn.2636616

Chi-Young Choi (Contact Author)

University of Texas at Arlington - College of Business Administration - Department of Economics ( email )

Box 19479 UTA
Arlington, TX 76019
United States

Joo Yong Lee

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Roisin O'Sullivan

Smith College - Department of Economics ( email )

Northampton, MA 01063
United States

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