The Effect of Financial Market Integration on Monetary Policy and Long-Term Interest Rate in Korea and Its Policy Implications

5 Pages Posted: 19 Mar 2018

See all articles by Kyunghun Kim

Kyunghun Kim

Korea Institute for International Economic Policy

Soyoung Kim

Seoul National University

Da Young Yang

Korea Institute for International Economic Policy

Eun Jung Kang

Korea Institute for International Economic Policy

Date Written: March 9, 2018

Abstract

Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence.

Keywords: Financial Market Integration, Monetary Policy

Suggested Citation

KIim, Kyunghun and Kim, Soyoung and Yang, Da Young and Kang, Eun Jung, The Effect of Financial Market Integration on Monetary Policy and Long-Term Interest Rate in Korea and Its Policy Implications (March 9, 2018). KIEP Research Paper, World Economy Brief 18-11. Available at SSRN: https://ssrn.com/abstract=3142503 or http://dx.doi.org/10.2139/ssrn.3142503

Kyunghun KIim (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Soyoung Kim

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)
+82-2-880- 2689 (Phone)

Da Young Yang

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Eun Jung Kang

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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