Abstract

This study offers some empirical evidence that changes in the US monetary policy affect
Korean financial market volatilities, and the efficacy of the Bank of Korea’s policy interest
rate to market long-term rate channel of monetary policy since 2000, with emphasis on
the post-2008 period, notable for unconventional US monetary policy. In addition, some
structural issues related to the financial health of Korean central bank’s balance sheet
are reviewed. Results suggest that capital inflow had weakened the efficacy of monetary
policy since 2008. The resulting expanded domestic liquidity appears to have contributed
to the trend of steady growth in Korean household indebtedness. Given the severe fluidity
of the external monetary/financial situation in the short term, having more flexibility in
policy rates in both directions seems advisable. It would also be desirable to grant more
autonomy to the Bank of Korea in disposing its operating profits so that it could build
up its equity reserves. This measure would enhance monetary policy credibility in the
medium term by allaying concerns that monetary policy deliberations might be
encumbered by potential operating losses, which could lead to onerous consequences for
the Bank of Korea.