Proceedings of the 16th International Academic Conference, Amsterdam

NORMALIZATION OF UNCONVENTIONAL US MONETARY POLICY AND ITS IMPLICATIONS: KOREA’S MONETARY POLICY CASE

CHAN-GUK HUH

Abstract:

This study offers some empirical evidence that changes in the US monetary policy affect Korean financial market volatilities, and the efficacy of the Bank of Korea’s policy interest rate to market long-term rate channel of monetary policy since 2000, with emphasis on the post–2008 period, notable for unconventional US monetary policy. In addition, some structural issues related to the financial health of Korean central bank’s balance sheet are reviewed. Results suggest that capital inflow had weakened the efficacy of monetary policy since 2008. The resulting expanded domestic liquidity appears to have contributed to the trend of steady growth in Korean household indebtedness. Given the severe fluidity of the external monetary/financial situation in the short term, having more flexibility in policy rates in both directions seems advisable. It would also be desirable to grant more autonomy to the Bank of Korea in disposing its operating profits so that it could build up its equity reserves. This measure would enhance monetary policy credibility in the medium term by allaying concerns that monetary policy deliberations might be encumbered by potential operating losses, which could lead to onerous consequences for the Bank of Korea.

Keywords: Monetary policy, Unconventional, U.S., Korea

DOI: 10.20472/IAC.2015.016.037

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