거시경제와 금융안정을 종합 고려한 최적 통화정책체계 연구

Optimal monetary policy system for both macroeconomics and financial stability

Joonyoung Hur and Hyoung Seok Oh

KDI Journal of Economic Policy, 2024, vol. 46, issue 1, 91-129

Abstract: The Bank of Korea, through a legal amendment in 2011 following the financial crisis, was entrusted with the additional responsibility of financial stability beyond its existing mandate of price stability. Since then, concerns have been raised about the prolonged increase in household debt compared to income conditions, which could constrain consumption and growth and increase the possibility of a crisis in the event of negative economic shocks. The current accumulation of financial imbalances suggests a critical period for the government and central bank to be more vigilant, ensuring it does not impede the stable flow of our financial and economic systems. This study examines the applicability of the Integrated Inflation Targeting (IIT) framework proposed by the Bank for International Settlements (BIS) for macro-financial stability in promoting long-term economic stability. Using VAR models, the study reveals a clear increase in risk appetite following interest rate cuts after the financial crisis, leading to a rise in household debt. Additionally, analyzing the central bank's conduct of monetary policy from 2000 to 2021 through DSGE models indicates that the Bank of Korea has operated with a form of IIT, considering both inflation and growth in its policy decisions, with some responsiveness to the increase in household debt. However, the estimation of a high interest rate smoothing coefficient suggests a cautious approach to interest rate adjustments. Furthermore, estimating the optimal interest rate rule to minimize the central bank's loss function reveals that a policy considering inflation, growth, and being mindful of household credit conditions is superior. It suggests that the policy of actively adjusting the benchmark interest rate in response to changes in economic conditions and being attentive to household credit situations when household debt is increasing rapidly compared to income conditions has been analyzed as a desirable policy approach. Based on these findings, we conclude that the integrated inflation targeting framework proposed by the BIS could be considered as an alternative policy system that supports the stable growth of the economy in the medium to long term.

Keywords: Macroeconomy; Financial stability; Monetary policy system; Interest rate rules; Household debt (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/289789/1/1884148611.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdijep:289789

DOI: 10.23895/kdijep.2024.46.1.91

Access Statistics for this article

KDI Journal of Economic Policy is currently edited by Dongseok Kim

More articles in KDI Journal of Economic Policy from Korea Development Institute (KDI) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().