The Korean Economic Forum
Evaluation of Recent Policy Stance and Issues in Korea's Monetary Policy
Inseok Shin (Chung-Ang University) and Hyunju Kang (Korea Capital Market Institute)Year 2022Vol. 14No. 4
AbstractAmid the possibility of further hikes following the Bank of Korea’s Base Rate hike in August 2021, this study evaluates Korea’s monetary policy stance and discusses related issues. Estimating a canonical quasi-structure model based on the Bank of Korea’s growth and price outlook, it is found to be consistent with the rationale for changing the policy stance of the Bank of Korea, with the GDP gap converted to positive in the future and real policy rate below the real neutral interest rate. However, as the potential growth rate continues to decline, interpreting the economic situation through the GDP gap and deriving policy directions involves the risk of error. In addition, as there are concerns about reducing policy capacity due to falling nominal neutral interest rates, raising trend inflation is a key task for monetary authorities but its necessity is not properly recognized. Finally, although financial stability has emerged as an urgent policy task for monetary authorities, it is necessary to take a careful approach to the adequacy of interest rate adjustments as a means of stabilizing housing prices and household debt.