Dynamic relationship between interest rate and inflation: the case of Korea

This study analyses the impact of the 1997 economic crisis on the dynamic relationship between the interest rate and inflation rate in Korea using the cointegration test and the spectral analysis method. The findings show that, at some point in 1997, the direction of long-term lead-lag movement between the interest rate and the inflation rate time series reversed, that is moving from inflation rate to interest rate became moving from interest rate to inflation rate. Also, in short-term, the result of Granger causality test shows that there exist a unidirectional movement from interest rate to inflation rate and the transfer function model confirms the causal structure concretely.