The Monetary Policy Reaction Function in Korea with Multi-level Factors

Byoungsoo Cho
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Byoungsoo Cho: The Bank of Korea

Korean Economic Review, 2020, vol. 36, 353-376

Abstract: The monetary policy reaction function in Korea is estimated. In particular, a variant of the Taylor rule is analyzed using information from a panel of macroeconomic variables in the United States (US) and Korea. The main findings are as follows. First, two global factors common to both countries are significant in the monetary policy reaction function,while no country-specific factors are significant. Second, the information contained in the sefactors is similar to variables, such as the credit spread in the US, the KRW/USD exchange rate, non-farm employment, and business survey indices for new contracts and sales in Korea. As such, these variables are also significant when added to the monetary policy reaction function. Third, the policy response to the inflation rate becomes significantly positive only when these additional variables are added, which is consistent with the legal purpose of monetary policy under the inflation targeting regime in Korea.

Keywords: Monetary Policy Reaction Function; Factor Model; Inflation Targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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