A data-oriented study of the international transmission of monetary policy shocks: The case of Korea

The international transmission of monetary policy shocks from developed economies (the U.S. and Japan) to the output of a developing economy (Korea) is examined using a VAR methodology. During the period of flexible exchange rates, it was found that the impact of shocks in the U.S. and Japan on Korea were different. Korean output shows a negative response to U.S. expansionary monetary policy shocks and a positive response to the Japanese expansionary monetary policy shocks in the short run. Changes in Korean output are explained through the trade balance effect and the real interest rate effect. In the trade balance effect, important factors are the money supply in Korea and Japan, the exchange rates and Korean export dynamics resulting therefrom. The other explanation is provided through changes in the real interest rates.; The international monetary interdependence issue is examined and it was found that, during the flexible exchange rate period, the Korean monetary authorities set monetary policy without regard to maintaining a target exchange rate between the U.S. dollar and the Korean won. However, in the case of Japan, the Korean authorities set monetary policy stance to keep the won undervalued against the Japanese yen.; Domestic transmission of U.S. and Japanese monetary policy shocks are examined with a focus on exchange rates and the trade balance. The U.S. dollar and the Japanese yen depreciate, in response to their own monetary policy shocks, against industrial countries' currencies. The U.S. trade balance shows similar dynamics with regard to its output, while the Japanese trade balance shows different dynamics.