A small-scale monetary policy model for Korea

We analyze a small-scale new Keynesian open economy model to assess the BOK’s monetary policy during the post crisis period. The model is estimated by the Bayesian Markov Chain Monte Carlo (MCMC) method. The results are largely consistent with the predictions of the new Keynesian model. Most importantly, the forward looking behavior plays an important role in the IS curve as well as in the Phillips curve. The estimates on the real exchange rate in the model show signs consistent with the theory. The monetary feedback rule tells that inflation and output have been equally treated. The weight on the exchange rate is relatively small, but the exchange rate seems to be another important concern of the BOK. The impulse response analysis confirms that the BOK tries to offset the impact of exchange rate shocks in a moderate but persistent way. (The rest omitted)