"International Transmission of U.S. Unconventional Monetary Policy Shocks with Small Open Economy Talyor Rule",
with Seong-Min Yoon, 2019, under revision for Journal of Macroeconomics. [PDF] [Slides]
Abstract: This paper analyzes the international transmission of U.S. unconventional monetary policy shocks to a small open economy, South Korea, by using the New-Keynesian DSGE model. We extend the Taylor rule for a small open economy to reflect the features of small open economy and the economic reality prevailing after the global financial crisis. In addition, we use the shadow policy rate to define the U.S. monetary policy shocks to the small open economy regardless of a zero lower bound (ZLB) problem. From the empirical analysis, we verify that the U.S. interest rate gap exerts a large influence on the monetary policy decision making in Korea. Moreover, we confirm that the U.S. unconventional monetary policy shocks have large impacts on the Korean economy, especially on the real exchange rate. The contributions of this paper can be summarized as follows. First, we suggest the extended-type Taylor rule that can be applied to the small open economy DSGE analysis. Second, we perform an empirical analysis, with the well-defined U.S. monetary policy shocks to a small open economy, over the ZLB and non-ZLB periods. These results imply that, after the financial crisis, policy makers in small open economies need to consider the prevailing economic reality and the ZLB problem when designing their monetary policy function.