Monetary Policy and the Bank of Korea

Abstract

The purpose of this paper is to explore issues related in the conduct of the monetary policy of the Bank of Korea. Although the paper covers the monetary policy of the Bank for the past 70 years, it mainly focuses on the contemporary issues emerged since the Korean economy has been incorporated into the global financial world in the wake of the Asian financial crisis. Korea has a unique position in the global economy. It is high-income country, but financially less developed. The financial sector has grown fast quantitatively, but not matured qualitatively. As a result, Korea shares the characteristics of emerging market economies located in the periphery of the global financial world and it acts as a key constraint on the monetary policy of the Bank of Korea. It is a well-known stylized fact that capital flows are highly volatile and procyclical in emerging countries and managing capital flows is an issue a central bank of an emerging market economy continue to grapple with. Here, trilemma is only a subset of policy constraints associated with capital flows. The problem confronting the central bank of an emerging country is much worse than that of an advanced country. It is more than the trade-off between macro stabilization and financial stability. It is the trade-off among macro stabilization, financial stability and international payments balance. As Korea has moved toward the global financial world, greater exchange rate flexibility and a massive accumulation of international reserves are not enough to secure monetary policy autonomy. This is the lesson from the global financial crisis. The fundamental reason for this reality is that Korea, like other developed countries, has neither the ability to produce safe assets on its own nor the ability to exchange won-denominated assets for safe assets. In order to enter the center from the periphery of the global financial world, it is necessary to internationalize Korean won. The paper concludes that when considering all things together restoration of self-confidence is a preliminary task in promoting won internationali-zation.