##2 year 3. 8 3. 4 3. 6 3. 0 3. 9 3. 5 private consumption 2. 9 1. 6 2. 3 1. 8 3. 8 2. 8 construction investment – 7. 1 – 3. 0 – 5. 0 2. 1 3. 4 2. 8 facilities investment 8. 9 – 1. 1 3. 7 5. 0 7. 3 6. 2 goods exports 14. 5 6. 9 10. 5 3. 8 5. 8 4. 8 source : bank of korea in the medium - to long - term, the growth rate is projected to decline due to a falling birth rate and ageing population. total fertility rate ( persons ) : 3. 6 in 1970s → 1. 9 in 1980s → 1. 6 in 1990s → 1. 2 from 2000 to 2011 total & working age population source : national statistical office population by age groups source : national statistical office to boost the future growth potential, the key is making the transition from input - led growth to productivity - led growth. as the increase in the productive population will be limited due to the low birth rate, it is more effective to make efforts to increase the quality of human resources and to use the given labor resources more efficiently. bis central bankers ’ speeches more specifically, it is necessary to induce improvements in productivity as the driver of growth by enhancing that in the relatively laggard service industry and by increasing input quality through investment in r & d and innovative technologies. concluding remarks distinguished members of the asia society ladies and gentlemen, as i pointed out earlier, the asian emerging market economies are leading world economic growth and they are sure to become the axis of the world economy. it is worth noting the attention korea has been drawing from the international community for the way in which it overcame the asian currency crisis and the global financial crisis and the country is expected to contribute to global economic growth in the coming years as well. however, we cannot say that such rapid growth will last in korea and other asian emes, simply because they are currently exhibiting a remarkable economic performance. since the asian growth model is accompanied by several constraints such as the heavy reliance on overseas demand and production factors, the derivative use of advanced technology and a low degree of financial market development, it is important to recognize these shortcomings and strive to improve them. for instance, due to their heavy external dependence, asian emes were greatly affected by the recent financial crisis, even though it originated in the advanced western

understood by labour, business, the private sector and the other sectors of the economy. if these sectors understand that the bank targets inflation and that it is committed to the chosen target, this will engender public confidence about the reserve bank ’ s monetary policy procedures. i will now turn to the specifics of our inflation targeting monetary policy framework. the reserve bank monitors a number of factors that have a direct influence on inflation. these include the growth in money supply and bank credit extension, the changes in nominal and real salaries and wages, the nominal unit labour costs, the gap between potential and actual national output, the exchange rate developments and import prices. the oil price is another factor that has played a major part in domestic inflationary trends of late and one that we have closely monitored. this exogenous factor is one over which we have little control. another exogenous factor is food prices, which can be volatile as a result of drought or floods. and administered prices, those influenced by government or monopolies including medical and education costs, also have an impact on domestic inflationary trends. in order to monitor these factors, the reserve bank has embraced the system of a small core model supported by other models. it has moved away from the single large - scale macroeconomic model, in keeping with international developments. the aim is to keep the core model concise so as to focus on the key economic variables that influence inflation, as i have already mentioned. the core model incorporates some basic assumptions about the economy. it presupposes, among other things, that higher output cannot be achieved in the face of persistently higher inflation and that the level of prices in money terms and the rate of inflation in the longer term depend on monetary policy. changes in monetary policy, that is changes in the bank ’ s repo rate, are transmitted through the economy via various channels, the so - called transmission mechanism. however, the transmission mechanism is a complex structure and can encompass a large number of cause and effect scenarios. the traditional channel is the direct effect of changes in interest rates on demand and supply. changes in the repo rate have a direct effect on other interest rates, the exchange rate and decisions on spending and investment. changes in the repo rate, therefore, affect the demand for and the supply of goods and services. the pressure of demand against the supply capacity of the economy is the key factor influencing domestic inflationary pressures. the link between the reserve bank ’ s modelling activities and