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Monetary Policy in Korea through the lense of Taylor Rule in DSGE model

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  • Tae Bong Kim

    (Korea Development Institute)

Abstract

This paper shows assessments on the monetary policy of Korea based on an estimated model. During the sample period of the in ation targeting scheme, the monetary policy discretion, which is the monetary policy shock after the historical decomposition of the model, has been mostly in ationary while it was reducing the volatility of output growth and thus countercyclical. 3% target rate could have been achieved when the monetary policy shock's standard deviation was approximately half of its posterior estimate. Various degree of monetary policy stance has been simulated with the sample period. An aggressive monetary policy towards in ation stabilization would have generally led to the average level of in ation rate closer to its target rate but at the cost of higher volatilities of the output growth.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 746.

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Date of creation: 2013
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Handle: RePEc:red:sed013:746

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  1. Smets, Frank & Wouters, Raf, 2004. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach," Working Paper Series 0391, European Central Bank.
  2. Fernández-Villaverde, Jesús & Guerron-Quintana, Pablo A. & Rubio-Ramírez, Juan Francisco, 2010. "Fortune or Virtue: Time-Variant Volatilities Versus Parameter Drifting in U.S. Data," CEPR Discussion Papers 7813, C.E.P.R. Discussion Papers.
  3. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  4. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  5. Martin Andreasen, 2010. "How to Maximize the Likelihood Function for a DSGE Model," Computational Economics, Society for Computational Economics, vol. 35(2), pages 127-154, February.
  6. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
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