Korea: Background Papers
Author: International Monetary Fund
Publication Date:
02 Jan 1996
eISBN:
9781451822014
Language:
English
Keywords:
ISCR; CR; liberalization; GDP; central government; discount window; monetary policy in Korea; market share; supervisory activity; call market rate; Nonbank financial institutions; Open market operations; Money markets; Commercial banks; Loans
Download PDF (1.2 MB)

This Background Paper provides a broad overview of the structure and characteristics of public finances in Korea, and discusses fiscal policy against the background of the medium-term objectives. The analysis shows that despite constraints imposed by the institutional framework, the government has managed to maintain tight budgetary control. The paper analyzes trends in the size and composition of central government expenditure, revenue, financing, and debt. It also evaluates the stance of fiscal policy on the basis of summary indicators.

Abstract

This Background Paper provides a broad overview of the structure and characteristics of public finances in Korea, and discusses fiscal policy against the background of the medium-term objectives. The analysis shows that despite constraints imposed by the institutional framework, the government has managed to maintain tight budgetary control. The paper analyzes trends in the size and composition of central government expenditure, revenue, financing, and debt. It also evaluates the stance of fiscal policy on the basis of summary indicators.

II. Monetary Policy in Korea—Institutional Framework, Targets and Operating Procedures 1/

1. Introduction

Monetary policy in Korea has traditionally operated within a framework designed to foster investment and growth through preferential financing for targeted sectors and activities. In the 1970s, government intervention in the allocation of credit was extensive and monetary policy relied heavily on direct control instruments. The objective of promoting investment took precedence over price stabilization, with annual inflation rates averaging 16.9 percent. After 1979, policy priorities shifted toward stabilization, while government intervention in the financial system was gradually scaled back. This reorientation of policies succeeded in bringing inflation down to 5.6 percent during 1985-94. At present, the medium-term goal of monetary policy is to lower inflation further to partner country levels. At the same time the Government’s financial sector reform program envisages the phasing out of the remaining nonmarket elements in the operating procedures of monetary policy and the move to a fully market-based system. 2/

This chapter reviews the institutional framework, targets and indicators, as well as operating procedures of monetary policy in Korea. Section 2 describes the main features of financial institutions and markets. Section 3 discusses the intermediate targets and indicators that have been used to conduct monetary policy. Section 4 describes how monetary policy has operated—the main instruments and how they have been employed. Finally, section 5 contains a brief summary.

2. Institutional framework

The Korean financial system consists of the Bank of Korea (BOK), banks and nonbank financial institutions, as well as money and securities markets. Financial institutions and markets have traditionally been subject to extensive government regulation and intervention and have undergone significant structural changes since the early 1980s as a result of partial liberalization. One of the most notable developments has been the strong expansion of nonbank financial institutions and the simultaneous decline in the market share of deposit money banks. At the same time, the importance of the money market has gradually increased, as a less restrictive regulatory environment allowed the introduction of new instruments and thus improved the market’s intermediation capacity.

a. The Bank of Korea

Established in 1950 under the Bank of Korea Act, the BOK has been assigned the task of maintaining the stability of the value of money and furthering the efficient utilization of national resources through the sound operation and functional improvement of the banking and credit system. 1/ The BOK is responsible for the implementation of monetary policy, issues bank notes and coins, and acts as lender of last resort of the banking system as well as the Government’s bank. In the latter capacity it may extend credit to the Government in the form of advances or purchases of government bonds. The BOK is also responsible for the supervision of banking institutions and for holding and managing foreign exchange reserves.

The BOK acts under the direction and supervision of the Monetary Board, which consists of the Minister of Finance and Economy and the Governor of the BOK, who are members ex officio, as well as representatives of other ministries and banking institutions. 2/ The Monetary Board formulates monetary policy and guides the BOK’s supervisory activities.

b. Financial institutions

The financial sector in Korea consists of two distinct groups of institutions whose roles and regulatory treatment have differed substantially: deposit money banks (DMBs) and nonbank financial institutions (NBFIs) (Chart II.1). In 1994, the group of DMBs comprised 96 commercial banks (14 nationwide banks, 10 local banks, 72 foreign bank branches) and 6 specialized banks. Commercial banks engage in short- and long-term financing, the foreign exchange business, and other financial services—while the partly government-owned, specialized banks provide preferential loans for special sectors such as housing, agriculture, and small- and medium-size enterprises (SMEs). Both commercial banks (with the exception of foreign bank branches) and specialized banks have traditionally played a key role as outlets for the Government’s policy-based lending and have thus been subject to a greater degree of government regulation than other financial institutions.

Chart II.1.
Chart II.1.

Korea: Financial Institutions in Korea 1/

(End 1994)

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Source: Monetary Policy and Its Instruments, Bank of Korea, 1994.1/ Figures in parentheses represent the number of institutions. Figures in brackets represent the year in which the institution was established. Where there is more than one institution in a group, the year refers to that of the first institution to be established.

The main funding source of DMBs is deposits (including CDs), which accounted for over half of their total liabilities and net worth in 1994. Within the DMB sector, foreign bank branches have only a small deposit base and rely mainly on foreign (interoffice) liabilities for funding (Table II.1). Borrowing from the BOK and the Government accounted for 4 percent and 3 percent, respectively, of DMBs’ total liabilities and net worth in 1994, with borrowing from the Government concentrated mainly among specialized banks. DMBs held nearly half of their assets in the form of loans and discounts in 1994, while securities and foreign assets accounted for 11 percent and 5 percent, respectively, of their assets.

Table II.1.

Korea: Deposit Money Banks—Structure of Assets and Liabilities

(In percent of total assets, end of 1994)

article image
Source: Bank of Korea, Monthly Statistical Bulletin.

Includes acceptances and guarantees, and net worth.

Includes debentures which account for 5.1 percent of total assets.

Includes net worth.

Within the NBFI sector, four types of institutions can be distinguished: savings institutions, development institutions, investment companies, and life insurance companies. 1/ Of these, savings institutions, such as mutual savings and finance companies, credit unions and mutual credit facilities, resemble banks closely in that they accept deposits from the public and grant loans (Table II.2). Development institutions, such as the Korea Development Bank (KDB), the Export-Import Bank of Korea (EXIMB), and the Korea Long-Term Credit Bank (KLCB), mainly provide long-term financing for targeted projects or sectors. Their main funding sources consist of government capital and lending, long-term debentures, and international promissory notes. Investment companies raise funds mainly by offering cash management accounts, borrowing, and issuing their own paper. They provide short-term financing to non-financial corporations and play an important role as brokers/dealers in money and capital markets.

Table II.2.

Korea: Selected Nonbank Financial Institutions—Structure of Assets and Liabilities

(In percent of total assets: end-1994)

article image
Source: Bank of Korea, Monthly Statistical Bulletin.

The Korea Development Bank is the largest of the three development institutions. It accounted for over two thirds of their combined assets in 1994.

Includes securities investment trust accounts.

Includes net worth.

Many NBFIs were established in the 1970s in order to absorb funds from the curb market. While interest rates of both DMBs and NBFIs have been subject to regulation, NBFIs have been allowed to offer higher deposit rates to provide attractive investment alternatives to the curb market. As a result, the share of NBFIs in total deposit increased rapidly while the market share of DMBs, both commercial banks and specialized banks, declined (Table II.3). By the mid-1980s, the downward trend in the market share of DMBs had become so pronounced that they were permitted to compete with NBFIs through special NBFI subsidiaries offering trust banking services. Responding to the favorable regulatory conditions, money in trust doubled its share in total deposits from 8 percent in 1985 to 16 percent in 1990, while the market share of traditional DMB deposits continued to decline.

Table II.3.

Korea: Trends in the Market Share of Financial Institutions, 1970-94

(In percent)

article image
Source: Bank of Korea, Monthly Statistical Bulletin, various issues.

c. Money and bond markets

Currently, nine categories of instruments are traded in the Korean money market: call money, monetary stabilization bonds (MSBs), treasury bills (TBs), commercial paper (CPs), negotiable certificates of deposit (CDs), repurchase agreements (RPs), commercial bills, trade bills, and, recently introduced, cover bills (Table II.4). While most of these instruments were introduced in the 1970s, they were subject to a variety of regulations regarding interest rates, maturities, and denominations, which impeded the development of the money market. In the 1980s, these regulations were gradually eased, and, in 1991, interest rates on most money market instruments were effectively liberalized.

Table II.4.

Korea: Money Market Instruments

article image
Sources: Bank of Korea, and Ministry of Finance and Economy; updated by staff.

Mainly used as monetary control instruments.

Abbreviations used in this table are as follows: investment and finance companies (IFCs); investment trust companies (ITCs); securities companies (SCs); insurance companies (ICs); and mutual credit organizations (MCOs).

The markets for call money traded among DMBs and NBFIs, originally segmented, were integrated in 1989. Nevertheless, discrepancies in interest rates of 25 to 75 basis points have persisted.

An auction system for the allocation of MSBs was introduced in 1993 but the Bank of Korea continues to allocate part of its issues on a mandatory basis.

An auction was introduced in 1993.

Restrictions on issue volumes, maturities, and minimum denominations continue to apply.

Restrictions on denominations and maturities vary by issue.

As a result of the gradual liberalization of the regulatory environment, 1/ the money market expanded rapidly in the 1980s, both in terms of size and diversity (Table II.5). In the second half of the decade, the rapid growth of the money market reflected in large part the expansion of MSBs that were issued to sterilize the liquidity effects of large current account surpluses. Furthermore, CDs have accounted for a rapidly increasing segment of the market, while the relative importance of commercial paper, which dominated the market in 1980, has declined steadily. Since 1990, however, the expansion of the money market has lagged behind the growth of major monetary aggregates and its relative size has declined somewhat.

Table II.5.

Korea: Money Market Trends, 1980-94

(In billions of won, and percent) 1/

article image
Sources: Data provided by the Ministry of Finance and Economy; and Bank of Korea, Economic Statistics Yearbook.

Outstanding balances at end of period except for call market.

Average daily transactions from December 23 to January 7 of the following year.

Korea has a sizable bond market with total outstanding bonds in 1994 amounting to some 40 percent of GDP. Various types of government and public bonds account for nearly two thirds of the outstanding volume and corporate bonds for somewhat more than one third. 2/ While some government and public bonds have maturities of five years or more, 3/ most bonds have relatively short maturities. In 1994, nearly all offerings of corporate bonds had maturities of four years or less. In addition, many corporate bonds are guaranteed by banks. While the share of guaranteed corporate bonds in total offerings has declined since the late 1980s, they still accounted for over 60 percent of new offerings in 1994. Most bonds are held by financial institutions, which accounted for 90 percent of total holdings in 1993. Notwithstanding the considerable volume of bonds outstanding, the secondary market is insignificant. 4/

3. Intermediate targets and indicators of monetary policy

Monetary policy in Korea has traditionally been conducted by targeting monetary or credit aggregates. In the 1970s, monetary policy was geared toward facilitating investment financing in order to achieve rapid growth, and domestic credit was used as an intermediate target. In the 1980s, the focus of monetary policy shifted toward price stabilization and M2 became the principal intermediate target.

M2 growth has been used as the intermediate target of monetary policy since 1979 (see Box). The selection of M2 was based on empirical findings which suggested a relatively stable relationship between the M2 aggregate and nominal income (Chart II.2). 1/ Moreover, M2 proved to be easier to control than broader monetary aggregates, such as M3. With few exceptions, growth targets for M2 have generally been expressed in terms of target ranges (Table II.6). From 1979 to 1990, these targets applied to annual average growth rates. Since 1991 they have been defined in terms of the December over December average in order to permit greater flexibility in for monetary policy in the course of the year. Consistent with the Government’s objective of bringing inflation down to partner country levels over the medium term, the target range for M2 growth has been gradually lowered in recent years.

CHART II.2
CHART II.2

KOREA: INCOME VELOCITY OF MONEY, 1980–94

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Table II.6.

Monetary Targets and Outcomes, 1979-95

(Percent change of M2) 1/

article image
Source: Bank of Korea.

From 1979 to 1990, the figures refer to annual average growth rates; from 1991 onward, they refer to the 12-month growth rate of the December average.

The Monetary Board sets annual M2 targets consistent with the Government’s overall macroeconomic management plan. 2/ In essence, the determination of the target is based on a modified quantity equation (M*V=P*Y), which allows for changes in velocity, with projections for the main macroeconomic variables as inputs. In addition, the BOK makes use of more sophisticated money demand equations as well as detailed flow of funds projections. Once the M2 target range for the year has been determined, the BOK prepares detailed quarterly plans for monetary management, taking into account seasonal fluctuations in money demand, developments in government expenditures and revenues, as well as prospects for trade and capital flows.

In the early years of M2 targeting (1979-92), M2 growth tended to overshoot the targets by significant margins. Since 1983, however, the Bank of Korea has generally succeeded in keeping M2 growth within or close to the target range—with the notable exception of 1990, when monetary policy shifted to an expansionary stance following a sharp slowdown in activity in 1989. The increased flexibility afforded by the switch in 1991 from an annual average growth target to a 12-month growth target for December has enabled the BOK to accommodate unforeseen shifts in M2 demand, such as the temporary increase in money demand following the introduction of the real name system for financial transactions in 1993. As a result, the variability of M2 growth in the course of the year has increased and annual average growth rates have differed substantially from the 12-month rates for December, both in 1993 and 1994 (Chart II.3).

CHART II.3
CHART II.3

KOREA: M2 GROWTH AND TARGET RANGES, 1988–95

(12-month percentage change) 1/

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Source: Bank of Korea, Monthly Statistical Bulletin; data provided by the Korean authorities; and staff calculations.1/ Monthly averages.

While Korea’s experience with M2 targeting has generally been positive, the question arises whether M2 continues to be the most suitable intermediate target for monetary policy. With NBFI liabilities expanding at a much faster rate than DMB liabilities, the relative size of M2, which includes only the latter, has declined steadily since the early 1980s. Moreover, the stability of M2 demand is likely to be affected by the ongoing process of financial sector liberalization. In principle, broader monetary aggregates such as M3, which cover a large variety of financial instruments, are less likely to be influenced by portfolio shifts than narrower aggregates. In practice, however, M3 continues to be difficult to control, because it includes a large share of NBFI liabilities which are beyond the BOK’s sphere of influence. With the choice of alternative intermediate targets thus effectively limited to modified versions of M2 or narrower aggregates, M2 has been retained as the principal intermediate target, albeit on a more flexible basis than in the past. In addition, other monetary aggregates, such as Ml and M3, have been used as supplementary indicators.

Korea: Composition and Developments of Monetary Aggregates

The main monetary aggregates are observed in Korea are M1, M2, M2A, and M3.

M1 includes currency in circulation and demand deposits held at deposit money banks.

M2 consists of M1 plus time deposits, savings deposits, and residents’ foreign currency deposits held at deposit money banks. 1/

M2A is a narrower, more transaction oriented version of M2. It excludes long-term time deposits and savings deposits with maturities of more than two years.

M3 is the broadest aggregate. In addition to M2 it includes deposits of nonbank financial institutions, as well as debentures issued, commercial bills sold, certificates of deposit, repurchase agreements, and, since July 1994, cover bills.

Partial liberalization of the financial sector since the early 1980s has been reflected in a strong expansion of less regulated financial instruments that are excluded from the M1 and M2 aggregates (Chart). Thus, while the increases in the ratios of M1 and M2 to nominal GDP have been relatively moderate, M3 grew from 40 percent of GDP in 1980 to nearly 150 percent of GDP in 1994.

uA02fig01

GROWTH RATES OF MONETARY AGGREGATES

(In percent per annum) 1/

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Source: Bank of Korea, Monthly Statistical Bulletin.1/ Based on annual averate stocks.

With most interest rates subject to some form of control or window guidance, interest rates have played a subordinate role as monetary indicators. The yield of 3-year corporate bonds, which is determined freely in the relatively narrow secondary market, has generally been used as an indicator of developments in market determined interest rates. In addition, interest rates on different money market instruments, some of which were liberalized only in the early 1990s, have become more important in recent years (Chart II.4). While the primary focus continues to be on the M2 aggregate, on a number of occasions, notably in mid 1993 and in late 1994, the BOK has accepted deviations from its monetary targets in order to contain increases in interest rates.

CHART II.4
CHART II.4

KOREA: DEVELOPMENTS IN MARKET-DETERMINED INTEREST RATES, 1989–95

(Percent per annum)

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Source: Bank of Korea, Monthly Statistical Bulletin.

4. Operating procedures of monetary policy

a. The evolution of operating procedures

The operating procedures used by the BOK to control the money supply have been determined by the limitations of available monetary policy instruments as well as shifts in the main sources of money growth. In the 1970s, monetary growth was dominated by the expansion of domestic credit, while the foreign sector absorbed liquidity (albeit generally on a moderate scale). Monetary policy relied mainly on credit ceilings and changes in reserve requirements to control monetary expansion. 1/ As the BOK’s discount window was used primarily to refinance policy-based lending, rediscount policy could not be employed as a monetary control instrument. Open market operations were constrained by the limited availability of suitable government debt instruments and the underdeveloped money market.

In the 1980s, facilitated by the broadening and deepening of the money market and the scaling back of policy-based lending, the operating procedures of monetary policy gradually changed with the BOK relying increasingly on indirect instruments such as open market operations. Open market operations increased sharply in the second half of the 1980s as the current moved into surplus and increases in net foreign assets became an important source of liquidity growth (Chart II.5). In order to sterilize the excess liquidity, the BOK resorted to issuing large amounts of MSBs. 1/ In addition, the BOK raised minimum reserve ratios and introduced, on a temporary basis, marginal reserve requirements. Credit ceilings in the form of guidelines on the credit extension of individual banks were removed in late 1988. 2/

CHART II.5
CHART II.5

KOREA: CONTRIBUTIONS TO M2 GROWTH, 1980–95

(12-month percentage change) 1/

Citation: IMF Staff Country Reports 1995, 136; 10.5089/9781451822014.002.A002

Source: Bank of Korea, Monthly Statistical Bulletin; data provided by the Korean authorities; and staff calculations.1/ End of period.2/ Consists of claims on private sector, claims on other financial institutions, and claims on official entities.3/ Consists of claims on government and government agencies.

b. Current operating procedures

While current operating procedures of the BOK are mainly based on indirect monetary control instruments, non-market elements persist. In particular, open market operations, which have become the main instrument for the control of reserve money, continue to rely partly on mandatory allocations.

The main instruments used for open market operations are MSBs and RPs. While other financial instruments—such as treasury bills and Foreign Exchange Stabilization Fund Bonds—have also been employed, their role has been limited by their small volume. Open market operations in RPs involving government or public bonds were introduced in 1989. They are conducted exclusively with DMBs in order to control short-term bank liquidity. Very short-term RPs with maturities ranging from 2 to 3 days are used to fine-tune DMB reserves, while long-term RPs with maturities of 7 to 15 days are intended to absorb (cover) less temporary reserve surpluses (shortages) and to signal the BOK’s intention to gradually tighten or loosen the monetary stance.

As noted above, placements of MSBs became an important instrument of liquidity control in the second half of the 1980s. MSBs are issued by the BOK with maturities ranging from 63 days to 546 days (with 364-day bonds dominating the market). 3/ In contrast to RPs, MSBs are also sold to NBFIs, which held nearly half of total outstanding MSBs at the end of 1994. MSBs have mainly been used to absorb non-temporary excess liquidity in the financial system, in particular liquidity arising from increases in net foreign assets. Thus, the outstanding amount of MSBs rose sharply during 1985-88 as the balance of payments registered large surpluses, declined during 1989-91 as the external position weakened, and increased again during 1992-94 as capital inflows necessitated significant sterilization operations.

While in the past RPs and MSBs were allocated on a mandatory basis, since March 1993, long-term RPs 1/ and 364-day MSBs have been sold through an auction process which resembles a Dutch auction. 2/ Based on the current level of the call market rate, the BOK determines a reservation price (maximum accepted yield) for RP auctions. All acceptable bids are executed at a single price determined by the BOK. If the volume of accepted bids does not match the desired transaction volume, the gap is closed by means of mandatory allocations at an interest rate which is usually five basis points below the rate fixed in the auction process. MSBs with 364-day maturity are auctioned in a similar fashion, with 64 primary dealers (DMBs and NBFIs) participating in the bidding. In the first five months of 1995, nearly one third of all MSBs were still allocated on a mandatory basis. 3/ The Government’s financial sector reform program envisages a gradual phasing out of such mandatory allocations.

Owing to the automatic rediscounting of policy loans at interest rates well below market rates (currently 5 percent), the BOK’s discount window has not been actively used as an instrument of monetary control in Korea. 4/ Discount policy has generally been limited to altering the eligibility criteria and discount ratios for the refinancing of policy loans. However, in order to enhance the system of monetary control, the Government plans to change the role of discount policy by gradually relieving the BOK of the responsibility for the refinancing of policy loans and by permitting greater flexibility in setting the discount rate. As envisaged in the financial sector reform program, an aggregate ceiling for the refinancing of policy loans was introduced in March 1994. 5/ The ceiling is set on a quarterly basis by the Monetary Board in light of prevailing monetary conditions. Within the overall ceiling, the BOK allocates available discounts among DMBs on the basis of their past lending activities. Following the introduction of the ceiling system, outstanding loans and discounts of the Bank of Korea fell from W 16.5 trillion in 1993 to W 14 trillion in 1994.

While in the 1980s the BOK used changes in reserve requirements and their enforcement to influence monetary conditions, required reserve ratios have remained unchanged since 1990. A required reserve ratio of 11.5 percent applies to all demand, time and savings deposits of DMBs, 1/ with the exception of certain long-term time and savings deposits with lower, preferential reserve ratios. 2/ Required reserves are calculated semi-monthly. In order to give DMBs time to adjust their reserve position, the reserve maintenance period lags the computation period by seven days. If actual reserves fall short of required reserves, the BOK can impose a penalty or extend a temporary liquidity loan (B2 loan), which carries a penalty interest rate (call rate plus 2 percent), as well as an obligation for the receiving bank to adjust its balance sheet. While NBFIs are not formally subject to reserve requirements, they are obliged to hold against a certain share their deposits MSBs at below-market interest rates.

Given the limited flexibility of reserve requirements and the limitations of rediscount policy, the BOK relies essentially on RP and MSB operations in order to influence bank reserves, which are used as an operational target in its day-to-day operations. Based on the monthly growth target for M2, the BOK calculates targets for DMB reserves twice a month. At the same time, the expected level of reserves is forecast, taking into account historical trends in reserves, as well as expected developments in government accounts and foreign assets and liabilities. If projected reserves diverge from the target, open market operations are used to withdraw or inject liquidity.

5. Summary

Institutional framework, intermediate targets, and operating procedures of monetary policy in Korea have changed significantly in the past two decades. With the gradual liberalization of the financial sector, nonbank financial institutions have expanded rapidly and financial markets have been broadened and deepened. The focus of monetary policy shifted, from supporting investment and growth through extensive policy-based lending, toward price stabilization through control of monetary growth. Operating procedures, once heavily reliant on direct policy instruments such as credit ceilings, have increasingly been based on indirect instruments, notably open market operations in RFs and MSBs.

Since 1979, monetary policy in Korea has focussed on M2 growth as the principal intermediate target. While the experience with this approach has generally been positive, monetary targeting in recent years has been complicated by structural changes in the financial system resulting from gradual deregulation, notably the liberalization of interest rates. In order to accommodate unforseen shifts in money demand, the BOK has adopted a more flexible approach to monetary targeting, while retaining M2 as an intermediate target.

The medium-term objective of monetary policy is to bring inflation down to partner country levels. At the same time, a reform of operating procedures is under way, which envisages the gradual phasing out of the remaining nonmarket elements in the present system, such as mandatory allocations of open market instruments. As part of its financial sector liberalization program, the Government plans to move to a fully market-based system of monetary control.

References

  • Bank of Korea, Annual Report, various issues.

  • Bank of Korea (1990), Financial System in Korea.

  • Bank of Korea (1993), Monetary Policy and its Instruments in Korea, Research Department.

  • Bank of Korea (1995), Monetary Management Policies and Procedures in Korea, Research Department.

  • Bartolini, L., and C. Cotarelli (1994), “Treasury Bill Auctions: Issues and Uses,” IMF Working Paper, WP/94/135.

  • Cho, Yoon-Je, and T. Hellmann (1994), “The Government’s Role in Japanese and Korean Credit Markets: A New Institutional Economic Perspective,” Seoul Journal of Economics, Vol. 7, pp. 383–415.

    • Search Google Scholar
    • Export Citation

  • Frankel, J. A. (1994), Recent Changes in the Financial Systems of Asian and Pacific Countries, mimeo.

  • Hur, Jae-Sung (1991), Financial Market Liberalization and its Effects on the Velocity of Money in Korea, mimeo.

  • International Monetary Fund, “Korea—Market Liberalization and Macroeconomic Policies,” SM/90/188, 9/26/90.

  • International Monetary Fund, “Korea—Recent Economic Developments,” SM/94/28, 1/31/94.

  • International Monetary Fund, “Korea—Recent Economic Developments,” SM/94/229, 8/29/94.

  • Jwa, Sung-Hee (ed.) (1993), “Korea—Market Liberalization and Macroeconomic Policies Monetary and Financial Policy Reforms: European Experiences and Alternatives for Korea,” Papers and Discussions from a Joint KDI/FES Conference, Seoul.

    • Search Google Scholar
    • Export Citation

  • Kang, Moon-Soo (1990), “Money Market and Monetary Policy in Korea,” Korea Development Institute, Working Paper No. 9020.

  • Marquardt, J. C. (1994), “Monetary Issues and Payment System Design,” (ch. 4), and “Payment System Policy Issues and Analysis,” (ch. 9), in B. J. Summers (ed.), The Payment System: Design, Management, and Supervision, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Meulendyke, A. M. (1992), “Reserve Requirements and the Discount Window in Recent Decades,” Federal Reserve Bank of New York Quarterly Review, pp. 25–43.

    • Search Google Scholar
    • Export Citation

  • Nam, Sang-Woo (1992), “Korea’s Financial Reform Since the Early 1980s,” Korea Development Institute, Working Paper No. 9207.

  • OECD (1994), Country Study: Korea, Paris.

  • Park, Yung-Chul (1994), “Korea: Development and Structural Change of the Financial System,” in H. T. Patrick and Yung-Chul Park (eds.), The Financial Development of Japan, Korea, and Taiwan: Growth, Repression, and Liberalization, New York.

    • Search Google Scholar
    • Export Citation

  • Ro, Sung Tae (1994), “Korean Monetary Policy,” in S. Haggard et al. (eds.), Macroeconomic Policy and Adjustment in Korea. 1970-1990, Harvard Institute for International Development.

    • Search Google Scholar
    • Export Citation

  • Tseng, W., and R. Corker (1991), “Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries,” IMF Occasional Paper, No. 84.

    • Search Google Scholar
    • Export Citation

  • World Bank (1993), “Korea Financial Sector Study,” World Bank Report No. 11373-Ko.

  • World Bank (1995), “The Emerging Asian Bond Market—Korea,” June.

1/

Prepared by Harald Hirschhofer with assistance from Eduardo Borensztein and Marianne Schulze-Ghattas.

2/

The financial sector reform program is discussed in chapter III.

2/

The Governor of the BOK is appointed by the President upon recommendation by the Minister of Finance and Economy. The central bank act is currently under revision and a change in the composition of the Monetary Board is being considered.

1/

In addition, the financial sector includes a number of other financial institutions such as securities companies, leasing companies, and non-life insurance companies.

1/

In addition, technical improvements in the trading and settlement infrastructure—such as the introduction of a blind brokerage system for the call market, and, most recently, of the BOK wire system, which includes a large value gross settlement system for call money transactions—have enhanced the transparency and efficiency of trading and reduced transaction risks.

2/

Government and public bonds include national government bonds, state government bonds, state enterprise bonds and MSBs issued by the BOK. Although MSBs typically have maturities of one year or less and are considered money market instruments, they are generally included in bond market statistics. For a detailed description of the Korean bond market see World Bank (1995).

3/

Certain national housing bonds have a maturity of 20 years, the longest maturity of all government bonds.

4/

See World Bank 1995 for a description of the secondary market.

1/

See Tseng and Corker (1991) and Hur (1991) for a discussion of the stability of alternative money demand functions for Korea.

2/

See Bank of Korea (1995) for a detailed description of the process of determining M2 targets.

1/

Another less commonly referred to aggregate is M2B. M2B consists of M2A plus certificates of deposit and repurchase agreements of deposit money banks, as well as short-term liabilities of NBFIs.

1/

During 1970-77, domestic credit was in fact used as an intermediate target of monetary policy. In 1978 it was replaced by M1 and in 1979 by M2.

1/

These placements of MSBs differed from conventional open market operations in that they were done on a mandatory basis and not at market interest rates.

2/

The evolution of the operating procedures of monetary policy in Korea is described in Bank of Korea (1993).

3/

The Monetary Board determines the maximum amount of MSBs that can be issued by the BOK. The amount of MSBs outstanding peaked at 31 percent of M2 in 1988 and declined to 19 percent of M2 at the end of 1994.

1/

Short-term RPs are sold/bought directly at prices fixed by the BOK.

2/

In a Dutch auction, bidders either congregate in one room or interact electronically. The auctioneer begins with calling an unreasonably high price (or low yield) and then progressively lowers the price until the entire stock is sold or a reservation price is reached (see Bartolini and Cottarelli (1994)).

3/

These mandatory allocations involved MSBs with shorter maturities which are not yet being auctioned.

4/

In 1994 the refinancing of policy loans accounted for almost 80 percent of total outstanding loans and discounts of the BOK.

5/

The ceiling applies to rediscounts of commercial and trade bills. Refinancing of policy loans to the agricultural, forestry and fisheries sectors remains outside the ceiling.

1/

The same reserve requirements are imposed on KDB and KLCB deposits.

2/

Deposits with preferential reserve ratios include workman’s savings for housing (3 percent), housing installment deposits (3 percent), mutual installment deposits (3 percent), workman’s property formation (3 percent), as well as time and installment savings deposits with maturities exceeding 2 years and household preferential installment savings deposits (all 8 percent). Foreign currency deposits held by non-residents are subject to a required reserve ratio of 1 percent.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Korea: Background Papers
Author: International Monetary Fund
Volume/Issue:
Volume 1995: Issue 136
Publisher:
International Monetary Fund
ISBN:
9781451822014
ISSN:
1934-7685
Pages:
131
DOI:
https://doi.org/10.5089/9781451822014.002

Korea: Financial Institutions in Korea 1/

(End 1994)

KOREA: INCOME VELOCITY OF MONEY, 1980–94

KOREA: M2 GROWTH AND TARGET RANGES, 1988–95

(12-month percentage change) 1/

GROWTH RATES OF MONETARY AGGREGATES

(In percent per annum) 1/

KOREA: DEVELOPMENTS IN MARKET-DETERMINED INTEREST RATES, 1989–95

(Percent per annum)

KOREA: CONTRIBUTIONS TO M2 GROWTH, 1980–95

(12-month percentage change) 1/