A monetary policy feedback rule in Korea's fast-growing economy

In Korea's high-growth economy, the Bank of Korea had been willing to tolerate double-digit inflation, provided that it remained at `non-explosive' levels. In this article, we estimate a monetary policy feedback rule for Korea and find that the upper threshold of tolerable inflation for the Bank of Korea was about 20%. It appears that the Bank of Korea's disciplined, rule-like approach to monetary policy was able to control inflation and keep it away from explosive levels, despite the well-known empirical regularity that inflation becomes more variable at higher levels. After 1983, however, our regime-switching model suggests that the inflation target has been 6%. We also find little evidence that the Bank of Korea has targeted real growth, except for a period in the mid-1980s when industrial production growth suggested that the economy was overheating, relative to an implicit growth target of 7.4%. We conclude with a discussion of possible reasons for Korea to choose to stabilize inflation at lower levels since the mid-1980s.