% annual growth rate:
Sources: M2 from Bank of Korea database and nominal GDP from IMF database, as at October 2018.
The medium-term relationship between money and nominal GDP growth in South Korea, 1983-2017
Five-year moving averages of annual % changes, with 1981 being the start of the first five-year period
Comment on monetary trends in South Korea
South Korea experienced high monetary growth both in the 1970s (almost 33% on average) and 1980s (27.56%), which, combined with the surge in oil prices in the mid and late 1970s, resulted in very high inflation (above 30%). The economy returned to macroeconomic stability with much lower rates of growth of money in the 1990s. However the ‘Asian financial crisis’ in 1997 provoked a recession and precipitated the collapse of the peg with the US$ which resulted in a nearly 50% depreciation of the won. This resulted in a spike in inflation (roughly above 10% in 1997). In response, the national central bank adopted an inflation targeting strategy more committed to price stability in 1998 and monetary growth since then has been much more stable and modest (see table above). Inflation has remained on target in recent years, with 2% as the inflation target for 2016 – 2018, and the economy has resumed a rather stable rate of growth since 2010.
In the aftermath of the Global Financial Crisis, the Bank of Korea and the government took a distinctive response – setting up a fund to help banks fulfil the higher (Basel 3) capital requirements. The fund was financed by the Bank of Korea purchasing different types of assets from the banking sector. This expansionary monetary policy contributed to maintaining the stability in the growth of money and thus to macroeconomic stability.