Macroeconomic Stabilization in an Era of Deepening Economic Integration: Global Monetary Tightening, the Integrated Policy Framework, and South Korea’s Structural Transition

This study investigates the cross-border propagation of foreign interest rate shocks in an era of deepening financial globalization and evaluates stabilization policies within the IMF’s Integrated Policy Framework. We find that advanced economies implement counter-cyclical monetary policy, whereas emerging markets are often forced into pro-cyclical rate hikes due to inflationary pressures. Augmenting monetary policy with foreign exchange intervention (FXI) or capital flow management (CFM) enhances stabilization, with FXI yielding superior outcomes in mitigating output and price volatility. We further recalibrate the model to reflect South Korea's transition to a net external creditor since 2014 amid deepening economic integration, a shift that appears to act as a structural stabilizer, dampening exchange rate depreciation and output contractions. However, the integrated policy mix entails a trade-off: stabilizing output while increasing consumption and trade balance volatility. These findings highlight the need to weigh output stabilization gains against the accompanying increase in consumption and external account volatility.