Optimal Macroprudential Policy for Korean Economy

Junichi Fujimoto ; Ko Munakata ; Yuki Teranishi

Associate Professor, National Graduate Institute for Policy Studies (GRIPS), Tel: 81-3-6439-6108, Fax: 81-3-6439-6010 j-fujimoto@grips.ac.jp
Economist, Bank of Japan, Tel: 81-3-3277-2893, Fax: 81-3-3277-2900 koumunakata@gmail.com
Associate Professor, Keio University, Tel: 81-3-5418-6731 yukitera@fbc.keio.ac.jp

JEL Classification: E44, E52, E61

Abstract

Fujimoto et al. (2014) set up a model with financial frictions through search and matching between firms and banks in the loan market. They also show that optimal policy criteria in the model include terms of credit variables. In this paper, we calibrate the model of Fujimoto et al. (2014) for South Korea and investigate the simple and optimal monetary and macroprudential policy rules that include credit variables in addition to the consumption gap and inflation rate as explanatory variables. We compare the performances of a standard Taylor rule and these optimal rules. Numerical simulations show that the simple macroprudential and monetary policy rules with credit terms can induce higher welfare than the estimated Taylor rule for the Korean economy. Simultaneously, simple macroprudential and monetary policy rules with credit terms do not always improve welfare.

Keywords:

Optimal macroprudential policy, Financial market friction

Acknowledgments

We thank participants at The Annual International Conference 2014 in Seoul. Views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

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