سیاست پولی بهینه در یک اقتصاد باز کوچک : یک مورد از کره

In this paper, we set up a new Keynesian model with imperfect pass-through effect to explore the effect of monetary policy in Korea. Key parameter values are estimated with Kalman filtering and a maximum likelihood estimation method. In our model, inflation-targeting rule still dominates alternative monetary rules in welfare dimension.

Recently, monetary authors recommend to implement inflation targeting among the available monetary rules. Of course, the inflation targeting policy can result in the trade-off between inflation and output stabilization when one incorporates the cost-push shock such as an oil crisis. In the world where the domestic inflationary pressure as well as the foreign inflationary pressure coexist, it is very uncertain whether the inflationary targeting rule is desirable in the small open economy like that of Korea. In this paper, we will discuss the effect of the trade-off between the inflation stabilization and output stabilization on the monetary policy. In particular, we will explore whether the inflation targeting is still desirable in the case of imperfect pass-through effect by comparing the welfare cost of alternative monetary policy rules such as a discretionary foreign exchange policy and the inflation targeting. In recent years, the new Keynesian economics that incorporates imperfect competition and nominal rigidities into a dynamic general equilibrium structure for an open economy have been developed. The theoretical development in the new Keynesian literature has made it possible to analyze the dynamic effects of monetary shocks in the presence of (in)complete international capital mobility and nominal rigidities. Considering the empirical fact that the nominal rigidities are important in understanding the real effects of monetary policy, it is natural to incorporate the nominal rigidities and explore the behavior of the macroeconomic variables such as exchange rates and the current account in the open economy. In the theoretical development of international finance, one can assume that the international markets for manufacturing goods are sufficiently segmented or not. For example, Obstfeld and Rogoff (2000) argue that the assumption of sticky prices in the producer's currency without international market segmentation is important for matching the behavior of the terms of trade. However, there is a large body of evidence against the law of one price. For this reason, we consider not only law of one price model, but also the imperfect pass-through effect model by setting up a full-fledged new Keynesian model. With this kind of new Keynesian model, we will apply Kalman filtering and maximum likelihood estimation method to estimate some parameters and then explore the effect of real shocks on the key macroeconomic variables such as real output, price, exchange rate, trade balance. Finally, we quantify the effect of monetary policy on the welfare and compare the welfare cost of alternative monetary policy rules. In particular, we will consider the general interest rate rules to analyze the effect of alternative monetary policy rule on welfare. The main findings of this paper can be summarized as follows. First, in spite of its simplicity, new classical model is quite successful in describing the important macroeconomic variables of Korean economy. Second, the inflation-targeting rule is still desirable even if there are imperfect pass-through of exchange rate and cost-push shocks, implying that the discretionary exchange rate policy should be dismissed. Third, the domestic price index (DPI) inflation targeting rule is better than the consumer price index inflation targeting rule in welfare respect even if one incorporates other frictions such as cost push shocks. Of course, one cannot generalize this conclusion to the model with financial market and labor market frictions that are important factors in Korean economy. The remainder of the paper is organized as follows: Section 2 presents a small open economy model with imperfect pass-through effect. Section 3 derives equilibrium conditions, and Section 5 presents the empirical result of the monetary policy as well as the welfare cost of alternative monetary policy rules. Section 5 concludes the paper.

Various monetary policies have been tried in the past; there were monetary policies that fixed the domestic exchange rate to a specific product or exchange rate of other countries (like Gold Standard or Breton Woods System) and there were policies that were devoted to controlling the Dutch and Swiss currencies. Inflation targeting policy is one of the most popular monetary policies in the modern society. According to Stone and Bhundia (2004), after 1990s, the number of countries using the fixed exchange rate policy is decreasing while the number of countries using the inflation targeting policy is increasing rapidly. This policy is especially popular in the emerging market countries. This is due to the stability of prices worldwide and the transition of emerging market's exchange rate system from the fixed exchange rate to elastic floating exchange rate. Korea switched to floating exchange rate system in 1997 because of IMF, and became inflation-targeting nation in the April of 1998 through the revision of Korean banking law. However, the problems that will be faced by the emerging markets that implements inflation targeting are not yet known. According to Stone and Bhundia (2004), Korea was inflation targeting right from 1998 to 2000. This means that the country's monetary policy stressed the stability of financial market and exchange rate even when its main goal was stability of price. Even though Korea became full-fledged inflation targeting country in 2001, there is still a big controversy over whether Korea should consider the impact of exchange rate on domestic economy when it implements its monetary policy. Implementing exchange rate policy that defends the competitive position of domestic products in the exchange market is as important as investigating the impact of exchange rate on domestic prices. In a world where there is an increasing probability of cost push inflation (like oil crisis), inflation targeting monetary policy may result in the trade-off between the inflation and the economic growth. This trade-off between the inflation and the macroeconomic goal of exchange rate stability brings into question the desirable form of the monetary policy for the small open economy. However, in reality, even the full-fledged inflation targeting nations intervene in the foreign exchange market from time-to-time. Assuming small open economic model, this paper inspected the effect of the interest rate rule on economy when the economic structure of small open economies is vulnerable to the domestic and foreign environment. Markup of domestic companies and importers were critical in transmission of monetary policy and the interest rate rule had different effect on the domestic economy depending on the price index that was added to the target function. The result of analysis are as follows: Firstly, exchange rate peg policy does not stabilize domestic and consumer price regardless of the exchange pass-through and the cost-shock, so it is less desirable than the inflation targeting policy to the social welfare. When economy opens up, the domestic economy's incorporation to the international economy will increases, and therefore, the negative effect of exchange rate peg policy on the social welfare decreases. However, negative effect will always exist as long as imperfect pass through exists. Secondly, in the interest rate rule, whether monetary authority controls the interest rate considering or ignoring the change in the exchange rate depends on the economy's level of openness. When exchange rate diverges from the ordinary level, the interest rate rule that ignores the movement of exchange rate is more desirable than the one that controls it; however, when economy's openness increases, side-effects of monetary authority's intervention in the foreign exchange market decreases so the policy's negative effect on social welfare decreases. The most crucial point of this paper's simple new Keynesian model is the following: the monetary policy that stresses the major macroeconomic variables is more desirable from the social welfare point of view than the one that partially stresses the exchange rate. This means that intervening in the exchange rate of the foreign exchange market is undesirable to social welfare because it misleads the decisions of economic participants as it did in the IMF. In the future, major points of this paper should be inspected through a more precise model (one that takes into account various frictional market factors) to find more useful and applicable information.