The Choice of Monetary Regime for Post-Crisis Asia. The Case of South Korea

In post-crisis Asian economies, as in emerging economies, the economic growth hugely relies on the competitiveness of exports, while financial flows are volatile and economic policy credibility fragile, so that the stability of the real exchange rate is important. On the other hand, changes in the exchange rate have immediate impact on inflation while the real exchange rate is determined by inflation differentials between countries. Since the stability of prices remains the ultimate standard for policy credibility in emerging economies, as it affects the real exchange rate, the long-term commitment to price stability also needs to be emphasized. If Asian countries do not peg their currencies it raises the question of what alternative monetary policy operating strategy to adopt, possibly within the regional cooperation policy. The aim of this paper is to examine the relative merits of current versus future price stability; it is demonstrated here that it is called for a set of monetary arrangements that is built on a flexible form of inflation targeting with forward-looking policy rules in order to maintain the real exchange rate in the neighbourhood of his trend.