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The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.
Inflation targeting. --- Targeting, Inflation --- Monetary policy --- Banks and Banking --- Finance: General --- Infrastructure --- Investments: General --- Labor --- Macroeconomics --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: Government Policy and Regulation --- Investment --- Capital --- Intangible Capital --- Capacity --- Economic Development: Urban, Rural, Regional, and Transportation Analysis --- Housing --- Labor Demand --- Macroeconomics: Consumption --- Saving --- Wealth --- Banking --- Finance --- Labour --- income economics --- Financial sector stability --- Return on investment --- Self-employment --- Financial sector policy and analysis --- National accounts --- Consumption --- Saving and investment --- Banks and banking --- Financial services industry --- Self-employed --- Economics --- Korea, Republic of --- Income economics
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