Monetary Policy of Bank of Korea

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Monetary Policy of Bank of Korea
Department of Economics Shin Hyoung Kwon Un Jung
Whang Hyungwoo Kim
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Contents

• Introduction
• Objective of Monetary Policy
• Mechanism of Monetary Policy
• Monetary Policy Framework
• Inflation Targeting of Korea
• Summary

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Introduction

• What is monetary policy?
• Three macroeconomic policies
• Fiscal policy
• Exchange rate policy
• Monetary policy
• Independence of central bank

4
Objective of Monetary Policy

• Change of targeting over time
• Under the gold standard
• The resolution of balance of payments
• In great depression and the 1970s
• Removal of monetary laxity and price stability
• In the 1980s
• Financial stability
• Nowadays
• Price stability

5
Mechanism of monetary policy

• Interest rate mechanism
• For countries with well-developed financial
  market

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Mechanism of monetary policy

• Credit mechanism
• For countries with relatively many banks

7
Mechanism of monetary policy

• Asset price mechanism
• For countries with hot stock market

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Mechanism of monetary policy

• Exchange rate mechanism
• For countries with small open market

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Mechanism of monetary policy

• Pre-emptive monetary policy
• Considering time lag of mechanism it is necessary
  to implement monetary policy by predicting
  economic growth and price in advance.
• Annoying people who get rid of wine glasses when
  party is ripe.

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Monetary Policy Frameworks

• Monetary policy divided by Mishkin
• Exchange Rate Targeting
• Monetary Targeting
• Inflation Targeting
• Just-Do-It Operation

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Exchange Rate Targeting

• What is the Exchange Rate Targeting?
• Sustain the exchange rate with specific rate
• Hong Kong and Argentina
• How to operate the system
• Depreciation of Hong Kong dollar
• Inject US dollar into the economy
• Withdraw Hong Kong dollar
• What is the problem under the system?
• Allows the inflation keeping lower
• Risks happened by speculative attack

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Monetary Targeting

• What is the Monetary Targeting?
• One of intermediate targeting systems
• How to operate the system
• What is the problem?
• Premise for successful targeting relationship
  b/w intermediate and final target
• Monetary Targeting in Korea(1957-1996)

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Inflation Targeting

• What is the Inflation Targeting?
• No intermediate targets
• Inflation rate as a final goal
• How to operate this system
• Announce the target inflation rate
• Try to keep the target inflation rate
• UK, Sweden, New Zealand and Australia
• Premises for successful targeting
• Credibility of The Central Bank
• The precise prediction for future inflation rate
  

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Just-Do-It Operation

• What is this system?
• Without specific final goals
• Use the monetary policy with flexibility
• The monetary policy of FRB
• Premise for successful monetary policy
• Using the open-market operation
• Using federal fund rate

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Inflation Targeting

• A monetary policy regime in which the central
  bank announces an explicit inflation target and
  implements policy to achieve this target
  directly.

• Target Indicator
• Target Level
• Target Achievement Period

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Target Indicator
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Target Level

• Normative Method
• Set a target level that should be achieved over
  the L-R
• Deutsche Bundesbank had fixed its normative rate
  of price increases at a range of 1.52 from 1986
  
• Positive Method
• Set an achievable target based on price
  forecasts, the status of the financial markets,
  and the domestic and overseas economic
  conditions.

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Target Level
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Target Level
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Target Achievement Level
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Summary

• Monetary Policy Mechanism
• Monetary Policy Framework
• Inflation Targeting of Korea
• Conclusion