Discussion on “Monetary Policy of the Bank of Korea During the First Sixty Years” by Kyungsoo Kim and Jaewoo Lee Woon Shin Bank of Korea <#>

Outline of Kim&Lee(2010) • Overview of the History - War and its aftermath (1950~1962/65) - Big Push (1962/65~1983/85) - Liberalization (1983/85~1998) - Open Macro-economy • Global Crisis and Future Challenges <#> 2

Era of Mobilization (1962~early 1980s) • Role of BOK : agent of economic development - Mobilization of domestic savings - Allocation of credit to preferred sectors : light industry → heavy and chemical industry - Central Planner : Drafting “Economic Development Plan”(1961) <#> 3

Era of Mobilization (1962~early 1980’s) • Achieved high economic growth - GDP growth rate : 9.0% (1962 ~ 1983) • But at the cost of - Price stability : CPI inflation 14.3% (1966 ~ 1983) - Financial market development - Independence of BOK <#> 4

• Economic imbalances resulted from growth- oriented economic policies Stabilization & Liberalization (mid 1980s ~ 1998) • Economic imbalances resulted from growth- oriented economic policies - M2 growth rate over 40% in the early 1980s - CPI inflation over 30% in the early 1980s - Current account deficit over 1 bil. US dollars each year <#> 5

• Monetary policy began to turn to its attention to Stabilization & Liberalization (mid 1980s ~ 1998) • Monetary policy began to turn to its attention to economic stabilization. - BOK gradually reduced its monetary target growth rates - CPI inflation fell to a level of 2~3% <#> 6

• In line with economic stabilization, BOK Stabilization & Liberalization (mid 1980s ~ 1998) • In line with economic stabilization, BOK actively pursued financial liberalization. - privatization of commercial banks (1981~1983) - Interest rate liberalization (1991~1995) - deregulation of forex market • Asian currency crisis in 1997 - Liberalization : harbinger of crisis? <#> 7

Inflation Targeting (1998 ~ ) • Introduction of Inflation Targeting before 1998 after 1998 - objective(s) monetary stability price stability development of banking/credit system economic development - intermediate target M2 - operating target reserve money short-term interest rate <#> 8

Inflation Targeting (1998 ~ ) • Change in the Conduct of Monetary Policy - simple regression policy indicator = constant + a*policy indictor(-1Q) + b*(inflation – trend inflation) + c*(growth rate – trend growth rate) <#> 9

Inflation Targeting (1998 ~ ) (1985~1996) call = 2.35 + 0.81call(-1Q) + 0.28(π- πtrend) + 0.08(y- ytrend) (0.05) (0.55) m0 = 1.07 + 0.95m0(-1Q) – 0.27(π- πtrend) – 0.97(y- ytrend) (0.65) (0.06) (1999~2008) call = 1.22 + 0.70call(-1Q) + 0.10(π- πtrend) + 0.06(y- ytrend) (0.07) (0.01) <#> 10

Inflation Targeting (1998 ~ ) • Inflation targeting and price stability 1989~1998 1999~2009 - level : 6.2% → 3.0% - S.D : 1.8 → 1.1 - Persistence : 0.87 → 0.75 (AR coefficient) <#> 11

Inflation Targeting (1998 ~ ) • Inflation expectations were well anchored around the inflation target. <#> 12

Recent Crisis and Challenges • Negative supply shocks - IT and Great Moderation: success or luck? • Price vs. Financial Stability - Whether and how to respond to financial imbalances? - Lack of instrument <#> 13