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A monetary policy feedback rule in Korea's fast-growing economy

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  • Michael Dueker
  • Gyuhan Kim

Abstract

In Korea's high-growth economy, the Bank of Korea had been willing to tolerate double-digit inflation, provided that it remained at "non-explosive" levels. In this article, we estimate a monetary policy feedback rule for Korea and find that the upper threshold of tolerable inflation for the Bank of Korea was about 20 percent. It appears that the Bank of Korea's disciplined, rule-like approach to monetary policy was able to control inflation and keep it away from explosive levels, despite the well-know empirical regularity that inflation becomes more variable at higher levels. After 1983, however, our regime-switching model suggests that the inflation target has been six percent. We also find little evidence that the Bank of Korea has targeted real growth, except for a period in the mid-1980s when industrial production growth suggested that the economy was overheating, relative to an implicit growth target of 7.4 percent. We conclude with a discussion of possible reasons for Korea to choose to stabilize inflation at lower levels since the mid-1980s.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-014.

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Date of creation: 1998
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Publication status: Published in Journal of International Financial Markets, Institutions and Money, January 1999
Handle: RePEc:fip:fedlwp:1998-014

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Keywords: Monetary policy - Korea;

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References

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  1. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," NBER Working Papers 4449, National Bureau of Economic Research, Inc.
  2. Dueker, Michael & Fischer, Andreas M., 1996. "Inflation targeting in a small open economy: Empirical results for Switzerland," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 89-103, February.
  3. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
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Cited by:
  1. Sánchez, Marcelo, 2010. "What does South Korean inflation targeting target?," Journal of Asian Economics, Elsevier, vol. 21(6), pages 526-539, December.
  2. Sánchez, Marcelo, 2009. "Characterising the inflation targeting regime in South Korea," Working Paper Series 1004, European Central Bank.
  3. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
  4. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
  5. Giorgio Valente, 2003. "Monetary policy rules and regime shifts," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 525-535.

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