Interest Rate-oriented Monetary Policy Framework and Financial Procyclicality

Kyungsoo Kim, Byoung-Ki Kim, Hail Park
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Kyungsoo Kim, Byoung-Ki Kim, Hail Park: Sungkyunkwan University, Bank of Korea, Bank of Korea

Korean Economic Review, 2012, vol. 28, 161-188

Abstract: This paper shows that the current interest rate-oriented monetary policy framework if combined with sophisticated interbank transactions a la Adrian and Shin (2009), can foster or accelerate financial procyclicality since the central bank’s high-powered money can be used as a funding source for financial intermediaries. Interbank transactions that involve maturity transformations pave a silky way for the flow of high-powered money to end up as lending for the ultimate borrowers. This paper also provides some empirical evidence using Korean financial data. In particular, we find that the growth of non-core liabilities, as a close proxy for interbank liabilities, has substantial explanatory power for the growths of core assets, monetary base, and broad money. This paper explores the implications of the findings in terms of the central bank’s responsibility for asset price misalignments and financial stability.

Keywords: Monetary Policy Framework; Interbank Transactions; Financial Procyclicality (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 (search for similar items in EconPapers)
Date: 2012
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