The role of money in the dynamic is model

Abstract

As recently industrialized central banks conducted interest rate targeting, the usefulness of information of monetary aggregates for real economy has been discussed actively with focusing on the role of money in the IS model. This paper examines using Korean quarterly data of 1991:Q1 - 2010:Q2 the role of money in the backward-looking and forward-looking dynamic IS models. The money is not statistically significant in both IS models while the real interest rate is. However, in the subsample analysis where the sample is divided into pre- and post- Korea financial crisis to incorporate the possibility of structural break around Korea financial crisis, the money seems to have played an important role in the pre-crisis period whereas the money appears not to have been statistically significant in the post-crisis period but the real interest rate has been statistically significant in the post-crisis period. These results imply that the money provided important information for the IS model before the inflation targeting but since the inflation targeting in 1998, the Bank of Korea targets interest rate explicitly and thus, the usefulness of monetary aggregates in the IS model seems to disappear as monetary aggregates are determined endogenously.