seongtae lee : recognizing and coping with macroeconomic model uncertainty in designing monetary policy opening address by mr seongtae lee, governor and chairman of the bank of korea, at the the bank of korea international conference 2008, seoul, 26 may 2008. * * * ladies and gentlemen, i am indeed delighted to be hosting the bank of korea international conference 2008. all of us at the bank of korea are very honored that world - renowned scholars and central bankers have been able to get together to benefit us with the opportunity of hearing their collective wisdom on conducting monetary policy. i would especially like to express my deep gratitude to our keynote speaker professor thomas sargent, to our moderator professor barry eichengreen, to our roundtable panelists president james bullard of the federal reserve bank of st. louis, deputy governor lars svensson of sveriges riksbank, professors eric leeper and yung chul park, and to all of our chairpersons, speakers and discussants. this year's conference is being held under the theme of “ recognizing and coping with macroeconomic model uncertainty in designing monetary policy ”. in a rapidly changing environment, this is one of the hottest issues facing policy - makers and economists all around the world. this topic is also important to the bank of korea given that the korean economy is subject to the highly uncertain global economic situation. it is reported that the volatility of output growth and inflation has declined substantially in the united states and other major industrial countries since the mid - 1980s. there are various stories that seek to explain what has caused the decline in economic volatility. as federal reserve chairman ben bernanke pointed out, structural changes, improved macroeconomic policies or a favorable environment may have contributed to the “ great moderation ”. although there are disagreements about the causes, i believe that improved monetary policy has played a significant role in stabilizing macroeconomic fluctuations. the improvement in monetary policy, in turn, may be attributable to advances in macroeconomic theory at least in some respects. rational expectations and the “ lucas critique ” of policies based on econometric models motivated the launch of a new framework for the building of truly structural models that can analyse the effects of macroeconomic policies and institutional changes. all these efforts have deepened our understanding of how the economy works and what the optimal policies are. despite the progress in macroeconomic modeling, however, developments in economic conditions, especially in the highly integrated global environment, still

. this decision will mark the starting point of signaling domestically and internationally that our economic system will continue to function normally, independent of political processes. it is time for the parties to work together to ensure the stability of the nation's leadership. my dear colleagues, while maintaining a flexible approach to monetary policy in the short term, some of us in the bank must also reflect on why the trade - offs between monetary policy objectives have increasingly deepened to the point of constraining the policy. let us take exports as an example. concerns are growing about sluggish export growth as a major factor in the economic slowdown of the year, despite exports reaching an alltime high in terms of value last year. the underlying reason lies in the lack of diversification in our export structure, which remains heavily reliant on a few flagship products, such as semiconductors and automobiles. this concentration has made the overall export performance closely tied to the cycles of specific industries and therefore 2 / 7 bis - central bankers'speeches highly volatile. in addition, china, as a latecomer, has rapidly caught up with us in our major industries. in contrast, we have failed to develop new industries which can drive our future export growth. a stark illustration of this challenge is the comparison of the top 15 companies by revenue in korea and in the united states : over the past decade, seven new enterprises entered the u. s. list, whereas korea added only two. and among them, only one seems to be grown through emerging industries, which means that, in effect, there were almost no new entries. schumpeter's concept of " creative destruction, " which he identified as the major driving force of capitalism, emphasizes destruction as much as creation. the birth of innovative companies inherently involves the exit of those that fail to innovate. the lack of emerging companies and industries in korea raises a critical question : have we avoided addressing the social conflicts that accompany the process of creative destruction under the disguise of pursuing stability? currently, there is significant discussion about increasing corporate value, so - called value - up program, to revitalize the stock market. measures such as raising dividend payouts and improving corporate governance are undoubtedly important. however, it is more essential that new companies lead the stock market through competition and the process of creative destruction, much like how the " magnificent seven " companies now drive the u. s. stock market. at least in the economic sector, we must lift the regulations that