Business Cycles, Monetary Policy Stance, and Monetary Policy Transmission in Korea

Abstract

This paper investigates the asymmetric transmission of monetary policy across business cycles in Korea during the period following the global financial crisis. Utilizing a smooth transition-local projection regression method, we explore the asymmetric responses of output and prices to monetary policy shocks during economic booms and recessions. Monetary policy innovations are identified by orthogonalizing changes in the policy rate with respect to economic forecast information that policymakers consider in their decision-making processes. Our findings reveal that the impact of monetary policy on output and prices is substantial during recessions, whereas it is minimal and statistically insignificant during booms. By examining asymmetries arising from both business conditions and monetary policy stance, we show that the pronounced transmission effects during recessions are primarily driven by tightening monetary policy, while expansionary measures during recessions have limited effectiveness. These results suggest the need to reevaluate previous empirical findings which do not simultaneously consider the possibility of asymmetric transmission stemming from both business cycles and monetary policy stance.