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Structural changes and the scope of inflation targeting in Korea

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  • Gongpil Choi
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    Abstract

    A small, open macroeconomic model that accounts for new financial accelerator effects (the effects of fluctuations in asset prices on bank credit and economic activity) is developed to evaluate various policy rules for inflation targeting. Given conditions in asset markets and the fragility of the financial sector, monetary policy responses can potentially amplify the financial accelerator effect. Simulations are used to compare various forms of inflation targeting using a model that emphasizes long-term inflation expectations, output changes, and the asset price channels. The simulations suggest that a successful outcome can be obtained by adhering to simple forward-looking simple rules, rather than backward-looking policy rules. Furthermore, inflation targeting can contribute to price as well as output stability by helping to keep the financial accelerator from being activated. Inflation targeting in emerging economies can provide an environment conducive to long-term capital market development.

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    File URL: http://www.frbsf.org/publications/economics/pbcpapers/2001/pb01-05.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 2001-05.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedfpb:2001-05

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    Keywords: Monetary policy ; Inflation (Finance) - Korea;

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    1. Philippe Bacchetta & Eric van Wincoop, 2000. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 61-98 National Bureau of Economic Research, Inc.
    2. Frederic S. Mishkin, 1999. "International Capital Movements, Financial Volatility and Financial Instability," NBER Working Papers 6390, National Bureau of Economic Research, Inc.
    3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
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    12. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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    14. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
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