Strengthening the Monetary Policy Framework in Korea

29 Pages Posted: 14 Jun 2019

See all articles by Kevin Clinton

Kevin Clinton

Government of Canada - Bank of Canada

R. Craig

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Hou Wang

International Monetary Fund (IMF)

Date Written: May 2019

Abstract

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.

Keywords: Central bank policy, Bank rates, Interest rate policy, Central banks, Monetary policy, Korea, inflation targeting, output gap, ELB, inflation target, BOK, GFC

JEL Classification: E31, E39, E52, E62, G21, E01, O24

Suggested Citation

Clinton, Kevin and Craig, R. and Laxton, Douglas and Wang, Hou, Strengthening the Monetary Policy Framework in Korea (May 2019). IMF Working Paper No. 19/103, Available at SSRN: https://ssrn.com/abstract=3404058

Kevin Clinton (Contact Author)

Government of Canada - Bank of Canada ( email )

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R. Craig

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Hou Wang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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