How the Republic of Korea’s Financial Structure Affects the Volatility of Four Asset Prices

This study investigates the role of financial structure on the volatility of four asset prices in Korea. First, historical development of size, activity and efficiency of financial structure is investigated and development of non-bank financial institutions analyzed for the last three decades. Second, using the concept of bank-based and market-based financial structure, it is shown that there exists a stable long-run relationship among financial structure and volatility of real effective exchange rate, money market rate, stock price, and government bond yield on housing. Finally, we find that dynamic impact of financial structure is asymmetric to different financial variables. This implies that different transmission mechanisms of monetary policies are necessary to achieve different policy goals of the economy. For example, if the policy goal of the monetary authority is stabilizing the volatility of the money market rate, monetary authority’s intervention in the banking sector is more efficient than intervening into other sectors of the financial system. We report each case using cointegrating vector and impulse response function analysis. *Director of GPI,INC and Development Data Group respectively. This research began when the first author was an economist at the Development Research Group. We are grateful to Giovanni Majnoni, Judith McDonald, S. Kwack for their very helpful comments but all remaining errors are our own.