Monetary policy regime change and regional inflation dynamics: looking through the lens of sector†level data for Korea

Chi†Young Choi, Joo Yong Lee and Roisin O'Sullivan

Pacific Economic Review, 2017, vol. 22, issue 5, 814-840

Abstract: This paper explores the impact of the adoption of inflation targeting (IT) on the dynamics of city†level inflation in Korea using both aggregate and sector†level data. When looking at aggregate regional inflation, we find that the mean, volatility and persistence fell in all cities in the wake of the monetary policy regime change, consistent with other evidence in the literature. Delving more deeply into the disaggregate data reveals additional insights however. For most of the changes we observe in the dynamics of regional inflation, we find that the aggregate effects are being driven primarily by sectors that fall into the ‘Services’ category. We posit that the impact of better anchored inflationary expectations is primarily on the less†traded services sectors of the economy, where the domestic monetary policy framework has a relatively larger influence. When it comes to the increased co†movement observed across regions under an IT regime, however, it is the ‘Commodities’ sectors rather than ‘Services’ that are responsible, probably because services inflation becomes relatively more influenced by local factors once it has stabilized within the target range. Therefore, adoption of IT may not necessarily increase all measures of regional synchronization even when the goal of better†anchored inflationary expectations is achieved.

Date: 2017
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