The Korean Economic Review
An Empirical Assessment of the Korean Monetary Policy Since the Foreign Exchange Crisis
Seong Hoon ChoYear 2007Vol. 23No. 2
This paper evaluates the effectiveness of monetary policy on stabilizinginflation and output for the post-crisis era. The paper examines whether asizable moderation in inflation, observed in this period, is consistent with themonetary policy of the Bank of Korea through its interest rate channel. Althoughthe inflation rates have been within the inflation target range of the central bankfor the post-crisis era, we find that such an empirical fact is not supported by theinterest rate feedback rule of the central bank (i.e., the policy rule does not seemto have stabilized inflation). Instead, the BOK has focused more on moderatingfluctuations in real activities. Our empirical findings are robust to differentmodels, estimation methods and alternative measures of data. However, theresults are significantly different across the pre-crisis and post-crisis periods,implying that the Korean economy had experienced a structural change.Consequently, this paper argues that an empirical investigation with data,including the financial crisis, may question its validity and may not characterizethe current Korean economy.