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Evaluating Exchange Rate Management An Application to Korea

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Author Info

  • David Parsley

    (Vanderbilt University, Hong Kong Institute for Monetary Research)

  • Helen Popper

    (Santa Clara University, Hong Kong Institute for Monetary Research)

Abstract

This paper uses data-rich estimation techniques to study monetary policy in an open economy. We apply the techniques to a small, forward-looking model and explore the importance of the exchange rate in the monetary policy rule. This approach allows us to discern whether a monetary authority targets the exchange rate per se, or instead simply responds to the exchange rate in order to achieve its other objectives. The approach also removes a downward bias on the estimate of the extent of inflation targeting. We find that this bias is important in the case of Korea, a de jure inflation targeter. In contrast to previous studies, our findings suggest that the Bank of Korea actively targets inflation, not the exchange rate. Apparently, the exchange rate has been only indirectly important in Korea's monetary policy.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 282009.

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Length: 26 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:hkm:wpaper:282009

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Related research

Keywords: Exchange Rates; Exchange Rate Management; Monetary Policy Rule; Inflation Targeting; Exchange Rate Regimes; Exchange Rate Classification; Factor Instrumental Variables;

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References

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  1. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 379-408, May.
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  4. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics, Boston College Department of Economics 440, Boston College Department of Economics.
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  7. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
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  9. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  10. Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 308-326, March.
  11. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
  12. Soyoung Kim & Yung Chul Park, 2006. "Inflation targeting in Korea: a model of success?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 140-164 Bank for International Settlements.
  13. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  14. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
  15. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 300-351, February.
  16. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, American Economic Association, vol. 101(6), pages 2796-2822, October.
  17. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1069-1087, May.
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Cited by:
  1. Antonio Forte, 2010. "The European Central Bank, the Federal Reserve and the Bank of England: Is the Taylor Rule a useful benchmark for the last decade?," Journal of Economics and Econometrics, Economics and Econometrics Research Institute (EERI), Brussels, Economics and Econometrics Research Institute (EERI), Brussels, vol. 53(2), pages 1-31.
  2. Thomas Willett & Eric M.P. Chiu & Sirathorn (B.J.) Dechsakulthorn & Ramya Ghosh & Bernard Kibesse & Kenneth Kim & Jeff (Yongbok) Kim & Alice Ouyang, 2011. "Classifying international aspects of currency regimes," Journal of Financial Economic Policy, Emerald Group Publishing, Emerald Group Publishing, vol. 3(4), pages 288-303, November.

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