Title: Central bank transparency and inflation uncertainty: Evidence for South Korea
Authors: Seohyun Lee - Bank of Korea (Korea, South) [presenting]
Abstract: Crucial challenges to central bank transparency have been emerged due to high uncertainty since Great Recession. For a small open economy, inflation expectation may be affected by both domestic and global uncertainty. Against this backdrop, the dynamic behaviour of economic policy uncertainty, central bank transparency and inflation is examined by VAR model with South Korean data (April 2002-May 2017). The transparency is measured by the degree of discrepancy between the survey inflation expectation and target in the forward-looking perspective. The endogenous variables are: Economic Policy Uncertainty index, stock market index, interest rate, transparency index, inflation, and industrial production. In addition, three exogenous variables are included: oil price, EPU index of two largest trade partners of Korea, the US and China. We found that an increase in domestic uncertainty reduces transparency. One standard deviation shocks to uncertainty reduce transparency persistently until 9 month horizon with maximum effect of 0.089 decrease. Uncertainty shocks affect inflation to rise but significant only at 8 month horizon. The results confirm uncertainty spillovers from the US and China to Korean economy and the importance of China's economic policy uncertainty on Korean inflation. The forecast errors of inflation are constructed as inflation uncertainty. The inflation uncertainty rejects the Gaussianity.