Monetary policy in a changing financial environment: searching for an efficient monetary policy framework in Korea

This paper reviews how the changing financial environment in Korea has affected the conduct of monetary policy and examines the extent to which the Bank of Korea now uses the short-term interest rate rather than money aggregates as an operating target. Empirical results from estimation of monetary reaction functions suggest that the Bank of Korea has been following an interest rate target recently, even though it has not explicitly admitted to doing so. The paper also discusses how the conduct of monetary policy can be further enhanced by reforming the call money market and developing the long-term government securities market.