Will the Bank of Korea Manage Unemployment Like the US Fed?

Current Bank of Korea Act Includes Only Price and Financial Stability
Adding Employment May Conflict with Financial Stability Goals
Different Economic Structure from the US... Research Needed

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), speaking at the Jackson Hole virtual conference in Wyoming, USA, on the 27th (local time)
[Photo by EPA Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] As the U.S. Federal Reserve (Fed) announced on the 27th (local time) its intention to conduct monetary policy as an 'employment fighter,' attention is turning to whether the Bank of Korea (BOK) will also add employment to its policy goals. The COVID-19 pandemic has lasted longer than expected, worsening corporate conditions, and there are concerns that an employment cliff is inevitable.

The BOK expects the number of employed persons this year to decrease by 130,000 compared to last year, and the unemployment rate to rise to 4.1%. Professor Kim Jin-il of Korea University, a former Fed economist, said, "Judging from Fed Chair Jerome Powell spending a long time explaining the Phillips curve in his Jackson Hole speech, we can see how much the Fed has been concerned," adding, "However, whether this can be introduced in Korea is a matter that requires us to first study whether the same phenomenon is occurring here as in the U.S. before making a judgment."

According to Chair Powell's announcement, in the U.S., there is a phenomenon where inflation does not occur even when the employment market remains solid. In other words, when employment is sharply shaken, it means that there is no need to worry about a future surge in prices and that a low-interest-rate stance can be maintained. However, if Korea maintains low interest rates to revive employment like the U.S., there is no guarantee that inflation will not surge. In Korea's case, there is also the problem that asset prices such as real estate and stocks could surge as a side effect. Concerns have already been raised that the BOK's monetary easing in response to COVID-19 has only inflated asset prices, and considering the employment situation, the low-interest-rate stance is bound to continue.

Countries in a position similar to Korea also face the problem that if the asset market, which has been inflated, bursts, it could cause a significant shock. The 1997 Asian financial crisis and the 2008 global financial crisis are representative examples. The BOK added 'financial stability' to the Bank of Korea Act in 2011. Besides this, although the Fed has expressed its intention to prioritize employment in monetary policy, there are concerns about trust issues regarding what tools can be used going forward in a situation where interest rates are already at zero. Regarding this, BOK Governor Lee Ju-yeol said at a monetary policy direction press conference, "Changing the current monetary policy operation system has effects, but it is also true that there are many challenges to overcome," adding, "Since there is no perfect single alternative, we are reviewing how to change the monetary policy operation system to reflect the current trends."

Meanwhile, the BOK has long been conducting thorough research on the possibility of changing the inflation targeting system. At the monetary and credit policy report announcement in June, Deputy Governor Park Jong-seok stated, "It is expected that the low-interest-rate and low-inflation trend will not deviate significantly even after COVID-19," and "We are considering how to improve the current inflation targeting system to enhance the effectiveness of monetary policy."

This content was produced with the assistance of AI translation services.