The External Influences on Korea’s Monetary Policy: A Taylor Rule Study

The study investigates the external influences on Korea’s monetary policy over the period from 1990 to 2020. The focus was on the effects of US interest rates, payments imbalances and exchange rate changes on Korean monetary policy. The estimation of the Taylor rule measures the effects on Korean interest rates. The empirical tests of the Taylor rule implied that the impact of the US interest rate on Korean policy rate has been steady but weak throughout most circumstances. On the other hand, the impact of the exchange rate on Korean policy rate had varied before and after the GFC. The Bank of Korea monetary reports indicated that the overall balance of payments, in the aftermath of the Asian Financial Crisis, has been a main concern of Korean monetary authority while the status of domestic economy has been a main factor contributing to the impact that the exchange rate has had on Korean policy rate during the postcrisis period. Korean monetary policy has been influenced by monetary developments in the US, but it still has had a good deal of independence. At the end, the study concludes that exchange rate policy is an important part of overall monetary policy in Korea.