Choongsoo Kim: A "World leading, global BOK"
Farewell lecture by Dr Choongsoo Kim, Former Governor of the Bank of Korea, at the Bank
of Korea, Seoul, 31 March 2014.
* * *
"The issues are global and so interlocked that to consider the problems of one sector,
oblivious to those of another, is but to court disaster for the whole. While Asia is commonly
referred to as the gateway to Europe, it is no less true that Europe is the gateway to Asia.
And the broad influence of the one cannot fail to have its impact upon the other."
Douglas MacArthur, Farewell Address to Congress, 19 April 1951
It feels like only yesterday that I was completing preparations for my inaugural speech
expressing my vision and ambition on the airplane from Paris to Seoul after being appointed
Governor of the Bank of Korea. However, four years have already passed. At that time Bank
of Korea were about to wrap up one Chinese zodiac cycle, which holds a significant meaning
in Eastern societies, and greet a new one beginning with the BOK's 60th anniversary. I can
still vividly remember promising you that I would upgrade our Bank's status by adding global
competitiveness to the Bank's 60 years of tradition. It is no exaggeration to say that the goal
of making a "global" and "world leading" central bank, which are so mutually interlocked, has
not left my head for even a moment. This is because I have strongly believed that achieving
the goal was the calling of the time for me to become Governor of the Bank of Korea at
Bank's 60th anniversary.
I had a firm belief that the reform projects that I planned to pursue were essential for the
BOK's development. The simple truth that, if one tries to satisfy everyone he/she will not only
fail to satisfy anyone but also end up achieving nothing, was always in my mind. Thinking
that extending the front lines would not help to achieve the victory, I believe I began my
tenure by clarifying a clear but simple goal. With much to say to our employees and much
energy, I have left more than 1500 pages of writing for our employees so far. As I have
written most of this late at night or early in the morning, and not in the office or during
working hours, it is the result of my tension and passion with a single-minded resolve to
achieve a leap forward by the BOK. Instead of focusing on how many employees support my
views, I have wanted to deliver what is right and to see people improve themselves, if only a
few. I do not want to use this opportunity to recall my four years in office and list all of my
achievements. Achievements will be judged in the future, by history. I would like to take this
meaningful opportunity to think together with you all about the challenges that we now face,
to ruminate on the motivations and principles for what we have done, and to learn lessons
from them for our future.1
1
The reason why I have left so many writings to my fellow employees during my tenure is to allow them to go
back and check whether our commitments have been fulfilled, by documenting them. Although it has been
burdensome, I have done this in order to shackle myself as well. However, deciding whether to maintain this
practice until the moment when I leave office has been difficult. Although I am aware of the meaning of the
saying "silence is golden," having closely examined the practices of central bank governors in advanced
economies, and recalling our emphases on the importance of information disclosure through communication, I
have put my thoughts together in the belief that we also need to start a tradition of accurate recording. I have
also considered that central bank governors' deliberations are regarded as important historical records. In this
regard, I would like to leave my deliberations in the archive in the form of this farewell lecture. I believe that
this is the last contribution which I can make as Governor of the Bank of Korea. Today's lecture reflects my
own personal opinions, and does not represent the Bank's future policy directions, and any errors in it are fully
my own responsibility. I ask for the readers' understanding about my use of colloquial language for the sake of
convenience in giving this lecture, my use of foreign words without translating them into Korean, and my not
providing a detailed list of references as in a research paper due to time constraints.
I would like to take this opportunity to share directly with you the questions that I have been
concerned with, in the form of a farewell lecture instead of the previous custom of a farewell
speech. A farewell speech to recollect our memories would of course also be meaningful in
itself, in line with the natural law whereby people who meet must part. However, for an
economist who has studied economic policy his entire life, and have a unique background of
taking responsibility for managing diverse organizations, I thought that deliver my knowledge
and experience to my fellow workers in a lecture would be both a personal privilege and a
moral obligation. And this is why I have chosen the form of a lecture for this final opportunity
to communicate with my colleagues as Governor.
In this lecture, I would like to talk about five issues. First, I will explain the crisis management
policies that we implemented during the global financial crisis over the past six years, and
look for implications for dealing with possible after-shocks in the process of normalization.
Second, I will discuss the developments in monetary policy stance reflecting the changing
role of central bank post-crisis, the importance of and problems with communication policies,
and the harmonization between price and financial stabilization policies. Third, I will touch
upon the internal reforms implemented to reform the Bank of Korea into a world leading
central bank respected by the people, namely the projects based on a new creative spirit
under the slogan of "Never Before." The fourth issue will be on key principles and philosophy
on changes in the Bank's governance and its organization management during the past four
years. Lastly, I will conclude by listing some of our unfinished long-term business and
suggesting some requests to all of my colleagues for further development of our Bank.2
I. Globalization of financial crises, evolution of risk management measures and
policy responses
For the past six years, the focus of individual countries in operating their economies has
been on crisis management to overcome the global financial crisis.3 As you know well, the
usefulness of the various theories discussed in the existing economics textbooks have
become limited, and individual countries have come to face similar problems in a globalized
environment where all issues are mutually intertwined. During crisis times normal policy
responses, particularly those based on past experience, lose their effectiveness. Advanced
economies were not able to use their policy rates, the strongest traditional monetary policy
2
In drafting this lecture I referred to farewell addresses by political leaders including Dwight Eisenhower (1961),
Richard Nixon (1974), Tom Delay (2006) and Kofi Annan (2006), and also by other central bank governors
including Jean-Claude Trichet (2011) and Mervyn King (2013). I also referred to the unofficial farewell
speeches delivered by Governor Shirakawa and Chairman Bernanke at the BIS Governors' Meeting.
Particularly, General MacArthur's farewell address to the US Congress (1951), which was unprecedented at
that time because it was before the both houses and was historical because it summed up life's experiences,
and in which he said "the issues are global and so interlocked," was a very useful reference to me, full of
insight and wisdom, emphasizing the importance of a global perspective in establishing strategies and making
policy decisions. It was also what directly motivated me to decide to deliver this farewell lecture. Chairman
Bernanke (2014), in the annual meeting of the American Economic Association few weeks before his
retirement, delivered a farewell lecture on "The Federal Reserve: Looking Back, Looking Forward," while
Governors King (2013) and Subbarao (2013) delivered theirs on "A Governor Looks Back - and Forward," and
"Five Years of Leading the Reserve Bank: Looking Ahead by Looking Back," respectively. As an economist, it
seemed to me that delivering such speeches is a very desirable practice. This is another reason why I have
decided to deliver a farewell lecture instead of just a speech, which has been the custom. Considering that in
academia it is a general practice to pass on one's experience to students through a farewell lecture when
retiring, I think that the central bank community also needs to build the same tradition. Part of this lecture is an
excerpt from my farewell speech delivered at the BIS Governors' Meeting as the BIS-ACC Chair on
February 24, 2014, in Sydney, Australia.
3
Since my views on the current economic circumstances and policy challenges have already been circulated in
the results of several meetings, including with Director Generals and General Managers, those on my four
years at the BOK have been published in Bank of Korea News (March 2014 edition), and those on other policy
reforms have been presented to BOK staff on many occasions, I will not repeat them here.
instrument, and had to newly develop non-conventional instruments since their interest rates
had already hit the zero lower bound. EMEs, with their original sin, i.e. their inability to borrow
abroad in their own currencies, have had to put priority on dealing with the negative
spillovers from AEs' QE policies. While trying to explore new ways of responding to
unpredictable economic changes, they have at the same time had to overcome the difficulty
of needing to avoid simply applying their experiences acquired under the unsuited past
economic environment. AEs and EMEs are under a global economy where they are
interconnected with each other but have had to remain different in terms of their policy
instruments.
Past financial crises that have impacted the overall global economy include the Latin
American economic crisis in the 1980s, which was the symbol of a sovereign debt crisis; the
Scandinavian financial crisis of the late 1980s and early 1990s, resulting from accelerated
financial liberalization; second Latin American crisis in the 1990s, which stemmed from sharp
interest rate hikes in the U.S. while facing distortions in relative prices between tradable and
non-tradable goods; the Asian currency crisis in the late 1990s, owing to excessive corporate
debt, rigid exchange rate regimes and inadequate supervisory systems; Japan's long-term
recession; and the US savings and loan crisis.4 Experience tells us that we cannot dismiss as
a coincidence the fact that AEs and EMEs have taken turns in causing crises, while the
economic boom and bust cycle is an unavoidable natural attribute in the real market
economy system. We have learned some important lessons from these past crises - that,
since constraints which cannot be perfectly overcome, including information asymmetries
and market imperfections, always exist, we need to watch them closely, prevent the resulting
imbalances from going beyond a certain level, and pay attention especially to the impacts of
global shocks on our domestic economies.5
There is a broad consensus that the recent global financial crisis was caused by systemic
risk, and as pro-cyclicality and inter-connectedness are the key parts constituting risk, it is
widely known that the talks on global financial regulatory reforms including Basel III have
focused on these issues. However, even though EMEs agree with the consensus, they have
especially faced a dilemma in choosing between preventing financial crisis recurrence and
enhancing the competitiveness of their own financial sectors. While in order to restrain
regulatory arbitrage the same principles must be applied to all economies, application of the
same rules would result in the irony of EMEs, with less developed financial sectors, having to
bear larger costs than AEs, which caused the crisis. In this regard, we will need to gradually
explore more harmonious ways. Judging from past crises, the recent crisis can be
4
When I became Dean of the Graduate School of Pan-Pacific International Studies at Kyung Hee University in
1998, I created a course called "Economic Crisis Management" in a government-funded Master's program for
EME public officials. I believe this was the first course on crisis management ever established in Korea. There
were requests from foreign universities for the course syllabus, and other governments showed great interest
in the course as Korea had just experienced the currency crisis of 1997, and the world was paying close
attention to how Korea will implement the IMF bailout program. At the request of the government, I visited
numerous cities with many businesses with Korea including Los Angeles, San Francisco, Tokyo, Osaka, Hong
Kong, Singapore and Canberra, and explained to their opinion leaders including policy makers, academics
and journalists about the IMF program and the Korean government's efforts to overcome the crisis, and led
discussions on this. I believe this experience help me greatly to understand economic crisis. A case analysis
of economic crisis management is included in the lecture on "Financial Crises and Policy Responses: A
Korean Perspective" that I delivered to Policy Board members and executives of the Bank of Japan in the
Tripartite Governors' Meeting on August 3, 2010.
5
It would not be far from truth to say that the creation of the US Federal Reserve is the empirical evidence
showing that responding to financial crises is the original duty of the central bank. The Fed was created in
1913, after long consultation, to address the financial crisis that had caused bank runs in 1907, and its
functions were settled on in going through the Great Depression (Bernanke, The Federal Reserve and the
Financial Crisis, Princeton University, 2013).
characterized as a comprehensive one6 which has had all of the characteristics of the various
other crises I have listed above.
Greatly affected by changes in the external environment, we have had limited policy choices
in this kind of situation, and making decisions contingent upon changes in the global financial
markets has been regarded as desirable. The most difficult part of this strategy, however,
was having to bear the burden of making accurate judgments concerning variable external
conditions. Policy makers in Korea tend to make their decisions by focusing on
domesticspecific factors from a domestic-oriented point of view, without devoting much attention to
external factors. And in this case they fall into a dilemma. Their failure to recognize changes
in the external environment usually means that they fail to fully take the crisis situation into
account, and that past experiences applicable only to peacetime dominate their
decisionmaking.7 If the central bank is given just a single mandate of price stability, it can come up
with a consistent policy mix. However, when it has the additional mandate of financial
stability, it would be best to pursue appropriate harmony while reducing the possibility of
policy conflicts. In other words, it would be desirable to choose the so-called second best
option, where the achievement of either one of its two mandates is neither satisfactory nor
unsatisfactory.
Let me add a few more words about the policy authorities' concerns. If limits on the role of
fiscal policy in overcoming an economic crisis appear, then it is natural to expect a more
active role for monetary policy, but there are constant controversies at home and abroad
about what extent of such a role is appropriate. In terms of monetary policy there may be
differences in perception of what is an "accommodative stance", however the fundamental
issue is to determine whether more accommodative policy will lead to desirable results. This
is because we need to keep in mind that any policy entails costs. Rather than looking
whether a policy is Keynesian or not, from the economic philosophy point of view, we need to
see the issue as being whether we have experience based on empirical analysis. For
example, some European countries including the UK have implemented fiscal tightening
policies to stick to the EU agreement that fiscal deficits should be maintained at within 3% of
GDP, and these attempts have even at times been criticized. Recently, however, there have
been signs of economic recovery as a result of the conduct of such policies to ensure fiscal
soundness. Monetary and fiscal policies are fundamentally for operating the macroeconomy,
and, to increase productivity for the purpose of enhancing the economic growth potential,
restructuring efforts should be made at the same time. During times of crises we tend to be
blinded by short-term views, however, and this distinction becomes vague. Looking at it
dispassionately, anyone should recognize that costs continue to be accumulated structurally.
Nevertheless, in a situation in which short-sightedness dominates as if there were no
tomorrow, we face difficulties in not straying from basic principles even while satisfying this to
some extent. I think that conducting monetary policy while being skeptical about financial
stability is a fundamental concern.8
6
The development of financial engineering including derivatives, and the consequent rapid extreme
advancement of financial liberalization, sharp increases in public debt, contagion effects of QE policies on
neighboring economies including negative spillovers from QE policies, rigid exchange rate regimes, harm to
innocent bystanders from increased global financial market volatility as a result of increased global liquidity
brought about by QE policies, and the lack of financial regulatory and supervisory regimes
7
For instance, Taylor rule can be considered in research but even US Federal Reserve depends more on the
optimal control rule and regards the Taylor rule as ineffective during crisis times. It does not seem appropriate
for policy makers in Korea, in analyzing their policy directions, to use the estimates of the Taylor rule, with its
time series also including normal times.
8
Concerns similar to these have recently been raised at the FOMC meeting. These debates are expected to
continue in the processes of QE tapering and interest rate normalization. Please refer to Jeremy Stein,
"Incorporating Financial Stability Considerations into a Monetary Policy Framework", March 21, 2014.
To be more specific about policy concerns by looking at an example, the biggest challenge in
crisis management is that while it is difficult to find measures minimizing type I errors in
policy implementation, this process unintentionally create type II errors frequently. Since the
costs of a type 1 error of not foreseeing a crisis coming could be politically lethal, particularly
in an environment of deepening globalization, we cannot help but be conscious about the
probability of tail risks evolving into systemic risk. We can therefore easily make a type II
error, of sending the wrong signals, by talking about the issue of tail risk even when the
chance of a crisis arising is not so high. And if such errors accumulate, the subsequent social
costs cannot be ignored. Further, given the self-fulfilling psychological effects of a type II
error, the adverse effects cannot be downplayed. Although the cost may not be very evident
right now, as a policy decision-maker and an economic expert this is an issue that one
cannot but feel considerable intellectual burden.
The most outstanding phenomenon of the global financial crisis has been the surge in global
liquidity, which is an aftereffect of quantitative easing. It is very natural that abundant liquidity
brings about changes in prices and amplifies the degree of market volatility. In carrying out
policies in an open economy system, especially for a small open economy, low volatility in
foreign exchange rates play a very important role. As trend of globalization progresses, the
importance of foreign exchange rates is becoming ever greater.9 Judging from our
experience, foreign exchange rates have been proven to over-shoot, markets to
overrespond and therefore policy authorities are often observed to have the tendency to
overreact. This means that there is an immanent risk of maximization of type II errors. A case in
point is implementing a policy without considering how much the potential growth rate has
declined. I do not think that I need to emphasize the importance of the GDP gap again here,
as it is the economic variable that has received the most attention and been discussed the
most recently. If the potential growth rate declines and policies are implemented without
considering this, there is the danger of overestimating the negative GDP gap in absolute
terms in a time of crisis, and this could lead to excessive policy responses. The expression
"excess" itself already means that there are social costs entailed. It has taken courage to
make the efforts to escape this trap over the past several years, and so it is very regrettable
that the importance of these efforts has not been well recognized. Looking back in the future,
this may come to be seen as an additional social cost that we have had to pay to overcome
the global financial crisis. QE has been assessed as an appropriate choice, compared to
what would have otherwise been the case (i.e. counterfactual analysis). Of course, we
should end QE and carry out exit strategies in an appropriate manner now, while the net
marginal contribution, which considers QE's advantages and disadvantages, is still positive. I
think this is a policy issue that national policy makers should keep in mind.10
Even though signs of our having overcome the crisis are now detected in every corner of
society, we should not ignore the fact that crises in many cases cause aftereffects. And these
9
The importance of exchange rates in managing Korean economy has long been stressed. Although the
importance of a weak won was emphasized for promoting and supporting exports during the development era,
it is time to break from this old view in order to maximize public welfare through economic advancement, and
exchange rates should be determined based upon market fundamentals and macroeconomic conditions. If the
degree of exchange rate volatility widens owing to international financial market unrest, however, there is a
need for controlling the subsequent uncertainty to some extent by taking macroprudential policy actions, and
this need seems to be globally recognized.
10
It is very tricky to judge this in reality. For instance, it is hard for central banks not to consider criticisms that
they will drive their economies into recessions when trying to normalize interest rates, and in this case they
tend to make risk-averse decisions in order to escape social criticism. In particular, if they make more rosy
forecasts for their economies than other institutions, they will face criticism of not predicting risk properly and
being complacent. Of course, central banks need to overcome such groundless arguments made for the sake
of criticism only. It is not that central banks tend to cry wolf intentionally, but it is safe to say that they have the
intention of heightening the sense of vigilance by releasing pessimistic forecasts in a situation of prevalent
uncertainties, if they are not up to delivering accurate economic analyses.
aftereffects are highly likely to amplify volatility, as the special conditions of EMEs could
create contagion effects in the international financial markets in the process of interest rate
normalization.11 Although understanding the external environment requires experience, and
is not easy, it is essential to remain vigilant while equipping ourselves with international
viewpoints, in consideration of our economic situation in which we are vulnerable to external
shocks.12 It is safe to say that the time is over when we need to tiptoe on thin ice; we should
not forget that knowledge and wisdom are continuously needed to keep balance while we
walk on the border line.
II. Changes in monetary policy in line with the greater role of central banks since
the global financial crisis, bright and dark sides of communication policy, and
balance between price and financial stability
There is no area that has experienced greater change in the process of our overcoming the
financial crisis than monetary policy. As suggested in the rhetorical expression "the worst
crisis in 100 years," the usefulness of theories and experiences formulated in the past has
been considerably constrained, and as the borders among countries have disappeared due
to globalization, the lines between economic policies have been blurred and policies have
become interdependent. Since the government's policy measures have shown their limits,
the economy has begun to rely on the role of the central bank, and this has been well
demonstrated in the cases of advanced economies where various unconventional
instruments have been employed due to the constraints imposed by the ZLB. The expression
"unconventional tools" itself implies active central bank activities, even though the
instruments are an inevitable choice given the ZLB. And, in consequence, the introduction of
similar policies was expected in EMEs as well. In the political context, there was a view that
EMEs had reached their effective lower bounds and therefore it was difficult for them to lower
their interest rates further. And so there was no wide range of practical policy choices
available.13 Many academic issues have been raised including revisiting the role of the
11
After Chairman Bernanke's May and June 2013 press conferences concerning the possibility of QE tapering,
the international financial markets fluctuated greatly, and this was called the Bernanke Shock. Right after the
FOMC meeting on March 19, 2014, Fed Chair Yellen said that it will take "a considerable time" for interest
rates to be normalized after the end of QE tapering. Following her explanation that this period could be about
six months, stock markets in Asia including Korea declined dramatically in a case of market overreaction. I do
not think it is right to regard these as an unintended and inappropriate show of intent, but think it should be
viewed rather as evidence that the FRB has always thought of the need to attempt to test the markets and
reduce future shocks. However, it is important for us to note the possibility that certain EMEs may not be able
to be endure interest rate hikes in the process of interest rate normalization, just as in Mexico in 1994, and
that the negative effects could spill over to other nations.
12
This does not indicate that domestic views are right or wrong. Bernanke (2013) says that a "central bank is not
a regular bank, it is a government agency". However, my expression that the Bank of Korea is also a
government agency from a broad perspective has been regarded very negatively in our nation. Although there
is a unique historical legacy in Korea, this means that Korea is still stuck in past ideology rather than moving
toward the future.
13
There was a view on the one hand that there was room for changes in interest rates in EMEs, since they were
not facing the ZLB, while on the other hand there was a view that, given that their currencies were not key
reserve currencies, there was in reality no room for further cuts in their policy rates. For example, it is
interesting that when Korea's Base Rate was 2.5% the policy rates of a number of other EMEs including
Australia, New Zealand, Thailand and Poland remained at similar levels. Despite the differences among them
in many macroeconomic variables including potential growth rate, inflation expectation, employment rates, that
should be considered in deciding policy rates, their base rates were similar. This therefore could be the
subject of not only theoretical but also empirical analysis, and I raised this issue officially at the Jackson Hole
Meeting in 2013. Just as the US and Japan were facing ZLB under the different economic environments, I
raised the point that those EMEs were also in the same situation of facing effective lower bounds. Recently,
Thailand cut its base rate and New Zealand revised its rate upward, in accordance with their domestic
conditions. Of course, exchange rates are not said to be the direct target of monetary policy, except in the
case of a currency board system like that of Hong Kong, but we should in reality carefully observe the linkage
between exchange rates and interest rates.
central bank. However, the most important task is to discuss the objectives of monetary
policy, the role of the central bank in terms of asset price stability, which is the key to
harmonization of price stability with financial stability, and the usefulness of communication
as a monetary policy instrument.
First of all, over the last 20 years of the so-called Great Moderation, it was believed that low
inflation and growth could coexist, and the argument is already also widely known that this
confidence in fact sowed the seeds of the global financial crisis. Ultimately, this argument
raises the question of whether it is appropriate for central banks with a single mandate of
price stability, like the Bank of Korea, to maintain so-called (flexible) inflation targeting. In a
situation where inflationary pressures from the demand side are low as GDP gaps have been
negative for a considerable period of time worldwide, this debate has been raised with
central banks with a dual mandate of price stability and maximization of employment like that
of the US FOMC in mind.14 An argument that it is desirable to move toward price level
targeting has been raised, and at the same time an argument for adopting nominal GDP
targeting has also strongly emerged.15 Realistically, inflation targeting was suggested in the
early 1990s,16 and not a single country that has adopted this regime has ever given it up.
Although a specific policy cannot bring about results that satisfy everyone, we cannot say for
now that the shortcomings of inflation targeting outweigh its strongpoints. This is especially
true in Korea, where an inflationary bias has been prevalent for so long.17
Next, since the mandate of financial stability has been given to central banks, very active
debate has developed concerning what measures that central banks should implement and
what roles that they should play in regard to asset prices. As the real-financial linkages have
been pointed to as the main culprit behind the global financial crisis, the debate on so-called
14
We need to understand that the mandates of different central banks vary. For instance, the FRB has two
mandates of macroeconomic stability and financial stability, and the FOMC, which decides monetary policy,
has a role in maintaining price stability and maximum employment as stated in the text above. The Bank of
Korea Act defines the role of the central bank as ensuring price stability. And with the revision of the Act in
2011, the narrower range of the Bank of Korea's mandate has been specifically stated as price stability, with
consideration also to be given to financial stability.
15
In early 2013 I published a paper titled "Monetary Policy after the Global Financial Crisis" (The Korean
Economic Forum, No. 1, Vol. 6, pp 23-55). It was the first such attempt by a BOK governor, and I was trying
to use it as an opportunity to explain the monetary policy issues that were being raised internationally at that
time and to seek academic opinions on a new definition of central bank roles. It was part of my effort to create
a chance to broaden the horizon for discussions that had in the past been limited only to the narrow definition
of central bank functions. Please refer to this paper for discussions of various monetary policy regimes.
16
Last year I changed the name of the Price Report that the Bank of Korea has long issued, to the "Inflation
Report." The price level and inflation are two different concepts. Although Korea does temporarily experience
low inflation, since this does not mean low consumer price levels basically it is inappropriate to use the price
level and inflation interchangeably. The policy target is inflation, and not the price level. And so I thought it was
right to distinguish the two, especially in a situation where price level targeting was being discussed, and
therefore renamed the report. Considering that inflation targeting had been used as price stability targeting for
so lo