What does South Korean inflation targeting target?

This paper characterises South Korean monetary policy in the period of explicit inflation targeting that started in 1999. We calculate Bank of Korea’s parameters in the policy objective function, conditional on an estimated macro-model. We show that this central bank appears to have pursued optimal policy geared towards achieving price stability, while displaying a considerable degree of interest rate smoothing. In addition, the central bank loss function is estimated to include negligible weights on output and exchange-rate variability. 2010 Elsevier Inc. All rights reserved. § This paper benefited from comments received from Lillian Cheung and Daryl Ho, and from participants at a presentation at the 12th Conference on Macroeconomic Analysis and International Finance, Crete, May 2008. Discussions with Máximo Hemingsen are gratefully acknowledged. The views expressed here do not necessarily reflect those of the European Central Bank. The usual disclaimer applies. * Tel.: +49 69 1344 6531; fax: +49 69 1344 7602. E-mail address: [email protected]. 1 For the international experience on IT, see e.g. Carare and Stone (2006) and IMF (2005).