An Empirical Investigation of Monetary Interaction in the Korean Economy

This paper conducts an econometric investigation of monetary interaction in the Korean economy over the past two decades. The study pays close attention to a critical role played by broad money and an interest rate term spread in the economy. A vector autoregression of Koreas time series data reveals two cointe-grating relationships, both of which are consistent with macroeconomic theory: the rst relationship corresponds to a broad money demand function, while the second represents a monetary policy rule function. All the variables in the cointegrated system, apart from the broad money and term spread, are judged to be weakly ex-ogenous for parameters of interest, thereby allowing us to estimate a partial system with no loss of information. It is demonstrated that the preferred partial system characterizes interaction between money demand and monetary policy rule in the Korean economy