Money stock determination process and money multiplier: case of South Korea

This study aims to re-examine the money stock determination process for South Korea under the assumption of the existence of potential asymmetric (non-linear) relations (a mechanism) between the money stock and the monetary base. Because, the true and detailed diagnosis of this mechanism is crucially important for the Bank of Korea’s (BOK)’ monetary policy, as this country has been adopting an inflation targeting policy (ITP) for a long-time.

This paper applies the non-linear autoregressive distributed lag model by Shin et al. (2014). This model separates the original series of the monetary base into their increases (+) and decreases (−). The increases (+) and decreases (−) done by the BOK correspond to expansionary and contractionary monetary policies, respectively, in this study.

The empirical findings are two-fold. First, the money stock determination process in Korea has a non-linear (asymmetric) structure. This means that increases (+) and decreases (−) in the monetary base have asymmetric (different) impacts on money stock. Second, the BOK’s only expansionary monetary policy exhibits exogenous nature money stock determination with an almost stable money multiplier. These findings may help the BOK to take preventive precautions in its monetary policy implementations.

This study with its methodology may help the BOK to take preventive measures in its ongoing ITP proactively.