Two Essays on Monetary Policy

Abstract

This dissertation consists of two essays on monetary policy. In chapter 1, we investigate whether the actual inflation rate affects the future inflation target or whether the inflation target is set by tracking the past actual inflation rate, by examining nineteen inflation targeting countries. The analysis implies that the past inflation rate has a significant influence on the inflation target in the next period. That is, there exists endogeneity when central banks set their inflation targets. Furthermore, the degree of endogeneity is larger in low performance countries than in high performance countries. This means that endogeneity may come from the incentive for the central bank to raise reputation by closing the gap between inflation target and actual inflation. In chapter 2, which is written in Korean, we analyze the international transmission of U.S. interest rate hike using factor-augmented VAR (FAVAR) method. We identify U.S. interest rate policy shock and then estimate impulse-response functions of 22 countries outside U.S. for major macroeconomic variables. We find that U.S. interest rate hike shock lowers the industrial productions and consumer price indexes in most of these countries. However, the expenditure switching effect which means the improvement of trade balances caused by the depreciation of non U.S. dollar currencies is not significant. The result implies that it is possible that the world will suffer from economic slowdown if the Fed begins to raise interest rate.