STRUCTURAL CHANGES AND THE SCOPE OF INFLATION * TARGETING IN KOREA

Author: CHOI, GONGPIL

Source: International Economic Journal, Volume 17, Number 3, Number 3/Autumn 2003 , pp. 113-142(30)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

A small, open macroeconomic model that accounts for new financial accelerator effects (the effects of fluctuations in asset prices on bank credit and economic activity) is developed to evaluate various policy rules for inflation targeting. Given the conditions of asset markets and the fragility of the financial sector, monetary policy responses can potentially amplify the financial accelerator effect. Simulations are used to compare various forms of inflation targeting using a model that emphasizes long-term inflation expectations, output changes, and the asset price channels. The simulations suggest that a successful outcome can be obtained by adhering to simple forward-looking rules, rather than backward-looking policy rules. Furthermore, inflation targeting can contribute to price as well as output stability by helping to keep the financial accelerator from being activated. Inflation targeting in emerging economies can provide an environment conducive to long-term capital market development. [E51, F3, F41]

Document Type: Research article

DOI: http://dx.doi.org/10.1080/10168730300080022

Affiliations: 1: Korea Institute of Finance

Publication date: 2003-09-01