Lee Chang-yong "Emerging Economies with High Economic Uncertainty Must Have Sophisticated Forward Guidance" (Comprehensive)

Attended the US Jackson Hole Symposium... Bank of Korea Governor Speaks as First Session Presenter for the First Time

Lee Chang-yong, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporters Moon Jiwon and Jung Hyunjin] Lee Chang-yong, Governor of the Bank of Korea, recently emphasized that as global economic uncertainty increases, the monetary policy capabilities of emerging countries such as Korea and China are becoming even more important. In this situation, emerging countries must strive to establish sophisticated policy frameworks like scenario-based traditional Forward Guidance.

Governor Lee made these remarks on the 27th (local time) as a panelist in a session at the Jackson Hole conference held in Wyoming, USA. The Jackson Hole conference is a symposium hosted annually in August by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. This is the first time a Bank of Korea governor has appeared as a session presenter at the Jackson Hole conference.

On that day, Governor Lee gave a presentation titled "Lessons from Unconventional Monetary Policy for Emerging and Small Open Economies," where he mentioned central banks' Forward Guidance. He noted that during the COVID-19 crisis, advanced countries significantly expanded central bank assets, but in the process, weaknesses such as economic agents finding it difficult to predict policy changes due to issues with Forward Guidance were exposed.

Forward Guidance refers to a communication tool through which central banks signal the future direction of monetary policy based on their assessment of upcoming economic conditions. Governor Lee cited past examples of the Federal Reserve (Fed) indicating "low interest rates for an extended period" under conditions such as "at least until mid-2015" or "as long as the unemployment rate remains above 6.5%" as examples of unconventional Forward Guidance.

He explained, "If excessive simplification of (central bank communication) causes the market to underestimate uncertainty, the central bank finds it difficult to implement exit strategies." He cited the 2013 taper tantrum as an example, where despite the Fed's modest tapering and cautious mention of policy shifts, the market overreacted, triggering turmoil in financial markets.

Governor Lee also pointed out that due to such monetary policies in advanced countries, central banks have tried to maintain existing Forward Guidance out of concern for credibility loss, which he considered a side effect. He judged, "The difficulties central banks have faced in transitioning from low inflation to high inflation recently may partly stem from this rigidity delaying policy shifts."

He said that the recent discontinuation of Forward Guidance by major central banks might also be due to these shortcomings of unconventional Forward Guidance, which has significant implications for emerging countries like Korea and China. He emphasized, "For emerging countries, where external uncertainty is high, it is even more important to respond flexibly to rapid changes in economic conditions. Therefore, unconventional Forward Guidance, which greatly restricts the flexibility of exit strategies, seems unlikely to be an ideal policy tool for emerging countries."

As an alternative to unconventional Forward Guidance, Governor Lee mentioned "scenario-based traditional Forward Guidance." For example, last year, when opinions diverged globally on the persistence of inflation, if central banks had provided Forward Guidance by dividing scenarios into "long-lasting inflation" and "temporary inflationary pressure," it would have been more effective.

He said, "If Forward Guidance had been given in this form, acknowledging uncertainty, it could have helped respond more flexibly during the recent transition from a low inflation phase to a high inflation phase."

He then cited the Forward Guidance shown by the Bank of Korea after its first-ever "big step" (a 0.50 percentage point base rate hike) last month. At that time, the Monetary Policy Committee only mentioned in the official decision document that "the rate hike trend needs to continue," but in the subsequent press conference, Governor Lee added the condition "if domestic inflation trends do not deviate significantly from the forecast path," stating that rates would be raised by 0.25 percentage points for the time being.

Regarding this, Governor Lee explained, "After internal discussions, this was a kind of compromise taken by the Bank of Korea. This approach was to provide the minimum Forward Guidance that the market wanted while securing flexibility in future monetary policy operations."

Governor Lee stressed, "Emerging countries should strive to establish more sophisticated policy frameworks such as scenario-based traditional Forward Guidance. For emerging and small open economies to have unconventional policy tools optimized for their own conditions and needs, central banks need analytical capabilities, accumulated experience, and extensive research. Now is precisely the time to invest in this."

Meanwhile, according to Bloomberg News, during the panel discussion, Governor Lee said, "Considering the rapid aging and initial experiences of low inflation in other Asian emerging countries such as Thailand and China, including Korea, the likelihood of these countries returning to ultra-low inflation and low growth is high."

Governor Lee also directly mentioned Haruhiko Kuroda, Governor of the Bank of Japan (BOJ), saying, "He has been a respected mentor and someone who has advised me for a long time, but recently he has been of no help to me," adding, "In the short term, the weak yen is giving me a headache."

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