This document contains discussions regarding the Bank of Korea policy council held on May 29, 1992. Although governmental currency management is a fundamental economic mechanism, as policy it has often proved ineffective. The focus of this document is to examine the various limitations which inhibit the achievement of currency management goals, and to develop plans to overcome these limitations.
What are the limitations inhibiting the effectiveness of the current currency policy?
First of all, adjustment of the supply of currency from the Bank of Korea is no simple task.
Although significant effort was made to standardize financial supply and demand in the government sector—adjusted by government income and expenditure through measures to distribute tax payment periods— financial expenditures are concentrated in the fourth fiscal quarter. It is dangerous to modify the foreign finance sector, which is adjusted by the foreign currency to domestic currency ratio of the Bank of Korea, due to the potential influence on exchange rates fluctuation. In the financial sector, the quantity of currency is adjusted through loans and the rediscounts of central banks, as well as the adjustment of open markets. However, it is not effective in adjusting market elasticity, due to the high volume of institutional and policy banking.
The management of the currency supply through reserve fund rate adjustment has many limitations. The fluctuations of the reserve fund is not closely related to bank loans, and the imbalance in fund demand and supply in each type of banks causes systemic failure. The funding demands of large projects and corporations might be concentrated in commercial banks, resulting in chronic funding shortages, whereas in special banks, the fund is over-supplied.
In addition, in order for effective currency management in the object-economy system, there should be a stable and predictable relationship between currency supply and policy goals. However, at the time of the policy council, the financial market in Korea was subject to regulations which hindered the execution of adjustment to fit real demand.
In order to overcome these limitations, the emancipation of interest rates is essential, which could affect the economy as a whole. This document also points out that restructuring the loan systems of the central banks is pivotal to currency management. If funding flows without restriction, interest rates are adjusted by economic mechanisms, and the object-economy could also be improved.
The loan system of the central bank, which is oriented towards industrial policy, also should reduce autonomous support, and be converted to a total rediscount cap system, employed by every bank. Furthermore, support priority should be determined with multi-directional supplementary plans by forming government loan markets.
통화관리의 제약요인과 개선방향(Limitations and improvement directions of currency management)
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||BOK; KDI School|