The Korean Economic Forum
Nonborrowed Reserve Targeting : Fed's Experience and Implications for Korean Monetary Policy
Seungho Nah (Bank of Korea), Yonggun Kim (Bank of Korea), Dowan Kim (Bank of Korea), Seungcheol Lee (Bank of Korea) and Ahrang Lee (Bank of Korea), Year 2023Vol. 16No. 2
AbstractConsidering that the situation in which the Korean economy is currently facing is similar to that of Fed Chairman Volcker during his tenure, this paper examines the reasons why the reserve targeting system adopted by the Fed in 1979 was effective in suppressing inflation and the feasibility of introducing it as a tool for operating monetary policy in Korea. Volcker’s monetary policy reform, recognizing that the cause of chronic and recurrent inflation is the procyclicality of the money supply, reinforced the controllability of the money supply and secured the flexibility of the FFR, thereby restoring the public’s trust in the Fed and securing the effectiveness of monetary tightening. In addition, it can be evaluated as an effective communication strategy in that it improved the openness and transparency of the policy through the announcement of the short term money supply target, and circumvented criticism from the Congress, the media, and the market that the high interest rate policy would lead to. However, given the fact that the relationship between money and real activites is still unstable, the controllability of the money supply is low, and that the monetary targeting system can cause instability in the financial market, it is skeptical whether the effectiveness of the policy will be guaranteed in Korea. Besides, in a situation where interest rate-centered monetary policy is still effective, the grounds for abandoning the existing system also seem weak.