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The cost channel effect of monetary policy in Korea

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Myung-Soo Yie*
The views expressed herein are those of the author and do not necessarily reflect the official views of the Bank of Korea. When reporting or citing it, the author's name should always be stated explicitly.
_________________________________
* Economist, Monetary Studies Team, Institute for Monetary and E-mail: yie@bok.or.kr)
Economic Research, the Bank of Korea (Tel: +82-2-759-5411,
The author thanks the committee (Kyuil Chung, ByoungHark Yoo for their helpful comments.
and Bae-Geun Kim) and seminar participants at the Bank of Korea
The Cost Channel Effect of Monetary Policy in Korea
Myung-Soo Yie
Contractionary monetary policy reduces the price level in the long raises the price level at a short horizon. Impulse response analysis
run, but it is frequently observed that a positive interest rate shock and estimation of an interest rate augmented Phillips curve in Korea indicate the existence of a cost channel effect of monetary policy before the currency crisis period. Based upon these empirical results, this paper develops a dynamic stochastic general equilibrium model Moreover, in order to examine the role of the banking sector in the production function in the banking sector is introduced. I find from suggests that this result comes mainly from the facts that it takes in order to explain the price responses in Korea. The cost channel of monetary policy transmission is a key feature in the model. monetary policy transmission given cost channel, an explicit l


Full Text
Title The cost channel effect of monetary policy in Korea
Similar Titles
Material Type Reports
Author(English)

Yie, Myung-Soo

Publisher

[Seoul]:The Bank of Korea

Date 2008-08
Series Title; No Working Paper / no. 340
Pages 40
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Holding The Bank of Korea; KDI School

Abstract

Contractionary monetary policy reduces the price level in the long run, but it is frequently observed that a positive interest rate shock raises the price level at a short horizon. Impulse response analysis and estimation of an interest rate augmented Phillips curve in Korea indicate the existence of a cost channel effect of monetary policy before the currency crisis period. Based upon these empirical results, this paper develops a dynamic stochastic general equilibrium model in order to explain the price responses in Korea. The cost channel of monetary policy transmission is a key feature in the model. Moreover, in order to examine the role of the banking sector in the monetary policy transmission given cost channel, an explicit loan production function in the banking sector is introduced. I find from policy simulation that the cost channel effect of monetary policy has fallen dramatically since the currency crisis in 1997. (The rest omitted)