The Limits Of Monetary Policy Independence II

Posting will be limited during Christmas, both because I have other things to do and also because I can imagine that most of my readers will at any rate be focused on other things than hard-hitting economics commentary. However, for those of you who are nevertheless interested, and for the rest when they check in after Christmas, I will at least offer you this post, which are a follow up to my post "The Limits of Monetary Policy Independence". Bloomberg reports that many in South Korea points out that higher interest rates will fuel foreign capital inflows, which in turn could fuel asset bubbles. More specifically, the capital inflow will push the won higher something which will increase imports and divert the production of exporters into the domestic market. Meanwhile, many South Koreans will circumvent the higher domestic interest rates by borrowing in foreign currencies, something which will further push the won higher. Thus, while higher interest rates is effective in holding down consumer price inflation, it will only have a limited effectiveness in stopoping asset price bubbles. South Korea is however unlike for example Iceland probably big enough for the net effect to be positive, though it won't be as positive as some people think.