Group :
TITLE : [Economic Papers 5-2]
The Announcement
Effect of Monetary Policy in Korea
AUTHOR : Man-Sik Yu
CONTACT : Institute
for Monetary & Economic
Research
(tel: 82-2-759-5407, 5421 fax: 82-2-759-5410)
ATTACH :
EP5-2-03.pdf
Summary:
Since the introduction of an inflation targeting regime in 1998, it is
said that the transparency of monetary policy in Korea has been enhanced.
Notably, starting from 1999, the announcement of the monthly monetary policy
direction and the operating target for the overnight call rate not only
increased the transparency of monetary policy but also made attainment of the
target call rate faster. A few studies assert that this attainment of the target
policy rate is not purely due to the liquidity effect; rather, some other
mechanism such as an announcement effect. This paper investigates the direct
announcement effect in the reserve market together with the indirect
announcement effect in the financial market. First, in the reserve market, we
were able to find an announcement channel by finding out bigger liquidity
effect. Second, using various models that incorporate uncertainty in the economy
or uncertainty in monetary policy, this paper shows that the degree of
responsiveness of the interest rate spread to restrictive monetary policy
innovation after 1999 increases when explicit announcement of target call rate
is reflected in the model. This positive evidence of a direct and an indirect
announcement effect suggests useful monetary policy implications. The central
bank can enhance the stability of the financial market by reducing the
volatility of short and long term interest rate through credible announcements.
To obtain the credibility of policy announcements, the central bank should
attempt various methods such as increasing transparency of monetary policy.