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.