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Strengthening the Monetary Policy Framework in Korea

Author

Listed:
  • Kevin Clinton
  • Mr. R. S Craig
  • Mr. Douglas Laxton
  • Hou Wang

Abstract

Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank’s mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

Suggested Citation

  • Kevin Clinton & Mr. R. S Craig & Mr. Douglas Laxton & Hou Wang, 2019. "Strengthening the Monetary Policy Framework in Korea," IMF Working Papers 2019/103, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/103
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    References listed on IDEAS

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    Cited by:

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    2. Michael D. Bordo & Pierre Siklos, 2024. "The Importance of Sound Monetary Policy: Some Lessons for Today from Canada’s Experience with Floating Exchange Rates since 1950," Working Papers 320, Princeton University, Department of Economics, Center for Economic Policy Studies..

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