The International Transmission of U.S. Monetary Policy on the Korean Economy

Abstract

With the U.S. economy looking resilient, the Federal Reserve ("the Fed") is pushing to normalize the stance of monetary policy. The Fed ceased the bond-purchasing program (QE) in October 2014, and raised the federal fund rate in December 2015 for the first time since the 2008 global financial crisis. People worry that the Fed's contractionary monetary policy may have negative influences on emerging economies, referred to as the spill-back effect. In May 2013, Ben Bernanke, the former Chairman of the Federal Reserve, mentioned that the Fed may taper the size of the QE (taper tantrum), and emerging economies experienced sudden capital outflow in the short run; on average, a 7.0 percent devaluation of emerging economy currencies and 12.0 percent drops in the stock market. Ko-rea was not an exception, as foreign investors in Korea sold KRW 5 trillion (USD 4.4 billion) worth of stocks in one month (June 2015); the Korean stock market index fell 9.8 percent and the Korean won devalued by 4.1 percent. Similar patterns emerged for the first increase of the federal funds rate in December 2015. However, those negative impacts were recovered within one quarter. Thus, under the sluggish recovery of the US and the world economy, those negative effects will be relatively short run and limited.