Working Paper

A monetary policy feedback rule in Korea's fast-growing economy

Abstract: In Korea's high-growth economy, the Bank of Korea had been willing to tolerate double-digit inflation, provided that it remained at \"non-explosive\" levels. In this article, we estimate a monetary policy feedback rule for Korea and find that the upper threshold of tolerable inflation for the Bank of Korea was about 20 percent. It appears that the Bank of Korea's disciplined, rule-like approach to monetary policy was able to control inflation and keep it away from explosive levels, despite the well-know empirical regularity that inflation becomes more variable at higher levels. After 1983, however, our regime-switching model suggests that the inflation target has been six percent. We also find little evidence that the Bank of Korea has targeted real growth, except for a period in the mid-1980s when industrial production growth suggested that the economy was overheating, relative to an implicit growth target of 7.4 percent. We conclude with a discussion of possible reasons for Korea to choose to stabilize inflation at lower levels since the mid-1980s.

Keywords: Monetary policy - Korea;

Status: Published in Journal of International Financial Markets, Institutions and Money, January 1999

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1998

Number: 1998-014