The Effects of Influencing Macroeconomic Variables on Monetary Policy Shocks: The Case of Korea

Abstract

Uncertainty about the international financial market has increased during the global financial crisis in 2008. As a result, financial market and real economic variables of developed and emerging economies became more sensitive to changes in the international financial market than controls set by their own respective monetary policies. In particular, in the case of small open economies such as Korea, the development of monetary policy has given priority to foreign factors such as exchange rate and capital outflow rather than domestic economic policy targets such as inflation and economic growth. This has led to a decline in independence in the determination of interest rate levels. This paper analyzed how foreign structural shocks affect domestic macroeconomic variables. We also analyzed how domestic monetary policy changes affected domestic macroeconomic variables before and after the global financial crisis. In this study, the period was divided into the period before the global financial crisis (2000:01-2009:06) and after the global financial crisis (2009:07-2018:05). Block exogeneity structural VAR model was used for analysis. According to the results, each macroeconomic variables’ response to monetary policy has been counterbalanced or weakened by the global financial crisis. Thus, there has been structural change in the channel mechanism of monetary policy.