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Interest Rate-oriented Monetary Policy Framework and Financial Procyclicality

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  • Kyungsoo Kim, Byoung-Ki Kim, Hail Park

    (Sungkyunkwan University, Bank of Korea, Bank of Korea)

Abstract

This paper shows that the current interest rate-oriented monetary policy framework if combined with sophisticated interbank transactions a la Adrian and Shin (2009), can foster or accelerate financial procyclicality since the central bank’s high-powered money can be used as a funding source for financial intermediaries. Interbank transactions that involve maturity transformations pave a silky way for the flow of high-powered money to end up as lending for the ultimate borrowers. This paper also provides some empirical evidence using Korean financial data. In particular, we find that the growth of non-core liabilities, as a close proxy for interbank liabilities, has substantial explanatory power for the growths of core assets, monetary base, and broad money. This paper explores the implications of the findings in terms of the central bank’s responsibility for asset price misalignments and financial stability.

Suggested Citation

  • Kyungsoo Kim, Byoung-Ki Kim, Hail Park, 2012. "Interest Rate-oriented Monetary Policy Framework and Financial Procyclicality," Korean Economic Review, Korean Economic Association, vol. 28, pages 161-188.
    • Handle: RePEc:kea:keappr:ker-20121231-28-2-03
    as

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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20121231-28-2-03.pdf
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    References listed on IDEAS

    as
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    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, July.
    4. Kyungsoo Kim & Byoung-Ki Kim & Hail Park, 2011. "Monetary policy framework and financial procyclicality: international evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 51-57, Bank for International Settlements.
    5. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary Policy Framework; Interbank Transactions; Financial Procyclicality;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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