This paper extends the structural VAR model of Bernanke and Mihov (1998) to one
under a small-open economy in order to explore how the operating procedures of the
monetary and foreign exchange policy in Korea changed in the aftermath of the 1997 Asian
financial crisis. It finds strong evidence of apparent regime changes in the monetary and
exchange rate policy after the financial crisis. The implications for monetary policy in Korea
are that the operating procedure switched to a call rate target in the post-crisis period, but
that its stance on monetary policy may remain in transition under an inflation targeting
framework and a freely floating exchange rate regime. Moreover, the exchange rate
presumably plays an important role in monetary policy or as an intermediate monetary
policy target in order to stabilize prices.