Summary
This study reveals how a Korean monetary transmission mechanism evolves in the tumultuous decade of the 1990s. We show that (i) contractionary monetary policy shocks have more explanatory power for the post-crisis periods than for the pre-crisis period; (ii) the effects on output from external shocks attributed to the oil price and the U.S. federal fund rates are mixed; (iii) there is little positive spillover effect from the U.S. to Korea through the trade channel; and (iv) there is a positive spillover effect from the international capital market channel.
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Extract
The Monetary Transmission Mechanism of a Small Open Economy with Sweeping Financial Reforms: The Case of Korea
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INTRODUCTIONCentral Banks worldwide have two major tools for implementing monetary policy, money stocks, and interest rates. The monetary transmission mechanism describes how changes in money stocks or interest rates bring about changes in the country's key economic indicators such as gross domestic product or employment.1 While this definition sounds simple, the actual ways in which the mechanism works in the real world are quite complex and are not straightforward. In this study we evaluate the impact of monetary policy on key economic variables of South Korea (hereafter, Korea) - such as output, price, and exchange rates - during the period between 1991 and 2003. This period is marked by profound institutional changes in the Korean financial market following the Asian financial crisis in 1997.Kim (2000b) examines the effects of monetary policy shocks on key macroeconomic variables of Korea for a 16-year period leading up to the Asian financial crisis in 1997. In extending his study, the focus of our analysis is on the effects of changes in monetary policy of Korea as well as the extent of a spillover effect2 from U.S. monetary policy to the Korean economy. We compare the transmission mechanism in the two time periods bisected by the Asian crisis; namely, the pre-crisis period between 1991 and 1996 and the post-crisis period between 1998 and 2003.Lauded as an economic success model for other developing economies, Korea was well unde...See the full content of this document
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