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The Interest Rate Channel of Monetary Transmission under Low Inflation in Korea (in Korean)

Author

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  • Hyun-Euy Kim

    (Economic Research Institute, The Bank of Korea)

Abstract
Whether monetary policy retains its effectiveness during the present low inflation era is of primary concern to the monetary authority, but it remains an open question. This paper addresses this question by investigating how the traditional interest rate channel of monetary transmission has changed in the recent low inflation (1999~2004) era in Korea, relative to the past high inflation (1988~1998) period, using sizable firm-level panel data and the neoclassical model of investment. A two-step process based on elasticity approaches is employed to pin down more precisely each sequence of monetary transmission running from the policy rate to investment via the user cost of capital. The evidence suggests that the effectiveness of the interest rate channel in the low inflation period has been substantially weakened, so as to remain only approximately 20 to 30 percent of what would be predicted for the high inflation one. The main culprit in this is the dramatic decline in the elasticity of the capital stock, in absolute value, with respect to the user cost over the recent low inflation period, even though the elasticity of the user cost with respect to the policy rate has risen relatively.

Suggested Citation

  • Hyun-Euy Kim, 2007. "The Interest Rate Channel of Monetary Transmission under Low Inflation in Korea (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 13(1), pages 1-56, March.
  • Handle: RePEc:bok:journl:v:13:y:2007:i:1:p:1-56
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    References listed on IDEAS

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    More about this item

    Keywords

    User cost of capital; Business investment; Interest rate channel; Monetary transmission;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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