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Discussion on “Monetary Policy of the Bank of Korea During the First Sixty Years”

Discussion on “Monetary Policy of the Bank of Korea During the First Sixty Years” by Kyungsoo Kim and Jaewoo Lee. Woon Shin Bank of Korea. Outline of Kim&Lee(2010) • Overview of the History - War and its aftermath (1950~1962/65) - Big Push (1962/65~1983/85)

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Discussion on “Monetary Policy of the Bank of Korea During the First Sixty Years”

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  1. Discussion on “Monetary Policy of the Bank of Korea During the First Sixty Years” by Kyungsoo Kim and Jaewoo Lee Woon Shin Bank of Korea

  2. Outline of Kim&Lee(2010) • Overview of the History - War and its aftermath (1950~1962/65) - Big Push (1962/65~1983/85) - Liberalization (1983/85~1998) - Open Macro-economy • Global Crisis and Future Challenges

  3. Era of Mobilization (1962~early 1980s) •Role of BOK : agent of economic development - Mobilization of domestic savings - Allocation of credit to preferred sectors : light industry → heavy and chemical industry - Central Planner : Drafting “Economic Development Plan”(1961)

  4. Era of Mobilization (1962~early 1980’s) • Achieved high economic growth - GDP growth rate : 9.0% (1962 ~ 1983) • But at the cost of - Price stability : CPI inflation 14.3% (1966 ~ 1983) - Financial market development - Independence of BOK

  5. Stabilization & Liberalization (mid 1980s ~ 1998) • Economic imbalances resulted from growth- oriented economic policies - M2 growth rate over 40% in the early 1980s - CPI inflation over 30% in the early 1980s - Current account deficit over 1 bil. US dollars each year

  6. Stabilization & Liberalization (mid 1980s ~ 1998) •Monetary policy began to turn to its attention to economic stabilization. - BOK gradually reduced its monetary target growth rates - CPI inflation fell to a level of 2~3%

  7. Stabilization & Liberalization (mid 1980s ~ 1998) • In line with economic stabilization, BOK actively pursued financial liberalization. - privatization of commercial banks (1981~1983) - Interest rate liberalization (1991~1995) - deregulation of forex market • Asian currency crisis in 1997 - Liberalization : harbinger of crisis?

  8. Inflation Targeting (1998 ~ ) • Introduction of Inflation Targeting before 1998after 1998 - objective(s) monetary stability price stability development of banking/credit system economic development - intermediate target M2 - operating target reserve money short-term interest rate

  9. Inflation Targeting (1998 ~ ) • Change in the Conduct of Monetary Policy - simple regression policy indicator = constant + a*policy indictor(-1Q) + b*(inflation – trend inflation) + c*(growth rate – trend growth rate)

  10. Inflation Targeting (1998 ~ ) (1985~1996) call = 2.35 + 0.81call(-1Q) + 0.28(π- πtrend) + 0.08(y-ytrend) (0.05) (0.55) m0 = 1.07 + 0.95m0(-1Q) – 0.27(π- πtrend) – 0.97(y-ytrend) (0.65) (0.06) (1999~2008) call = 1.22 + 0.70call(-1Q) + 0.10(π- πtrend) + 0.06(y-ytrend) (0.07) (0.01)

  11. Inflation Targeting (1998 ~ ) • Inflation targeting and price stability 1989~19981999~2009 - level : 6.2% → 3.0% - S.D : 1.8 → 1.1 - Persistence : 0.87→ 0.75 (AR coefficient)

  12. Inflation Targeting (1998 ~ ) • Inflation expectations were well anchored around the inflation target.

  13. Recent Crisis and Challenges • Negative supply shocks - IT and Great Moderation: success or luck? • Price vs. Financial Stability - Whether and how to respond to financial imbalances? - Lack of instrument

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