The Korean Economic Forum
Price Stability and Financial Stability as Monetary Policy Objectives
Dongchul Cho (KDI School of Public Policy and Management)Year 2020Vol. 13No. 2
Abstract
Both price stability and financial stability are the policy objectives that a government should not give up. However, the central bank is the sole authority responsible for price stability, whereas, as for financial stability, financial authorities are delegated with more diverse and effective policy measures than monetary authority. This is the reason that Article 1 of the Bank of Korea Act stipulates ‘price stability’ as the main objective and ‘financial stability’ as an auxiliary one. In this light, it should be regarded as the mandate of the Bank of Korea not to perpetuate the deviation of inflation from the target, though it may be desirable to allow temporary deviations for the sake of financial stability.Yet, Korea’s inflation has been secularly lowered below the official target since 2012 as a result of monetary policy emphasizing financial stability over price stability, and finally approached the level provoking deflation woes. This paper argues that restoration of inflation targeting as a monetary policy framework is urgent to guard the Korean economy against the risk of vicious cycle of contraction, or deflation spiral.}