[Exclusive] Under Pressure from the National Assembly... Bank of Korea Also Considers 'Employment Stability' in Its Establishment Purpose

Research Initiated on Amendments to the Bank of Korea Act
Analysis of Effects Between Monetary Credit Policy and Employment Stability
Objective Study Conducted with External Experts

Lee Ju-yeol, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea (BOK) has decided to conduct research by mobilizing internal and external experts to understand the effects of adding 'employment stability' to its monetary policy objectives.

Amid the COVID-19 crisis, there has been growing support for the argument that central banks should be able to implement bold policies to stabilize employment. Recently, both ruling and opposition parties agreed to push for amendments to the Bank of Korea Act, and the BOK plans to verify the effects of monetary policy on employment through detailed research.

According to BOK officials on the 11th, the Bank plans to invite external monetary policy experts, including professors, to study the 'relationship between monetary policy and employment.' Although the composition of the expert group and the research and discussion methods have not yet been finalized, the principle that external experts should participate in the research has been decided.

Initially, the BOK internally judged that adding 'employment stability' to policy goals would have little effect. However, as central banks worldwide have been rolling out unprecedented policies due to the COVID-19 crisis, and criticism has grown that the BOK should take a more proactive stance, the Bank has decided to review the matter.

Since researching the impact of monetary policy on employment requires time, the BOK plans to coordinate schedules with lawmakers who proposed the amendment to the Bank of Korea Act and related National Assembly officials.

Originally, the BOK held a cautious stance on adding 'employment stability' to monetary policy goals. Considering Korea's rigid labor structure, it is uncertain whether monetary policy can influence employment as it does in the United States. It is also problematic that 'employment stability' cannot be simply judged by fragmented employment data such as the unemployment rate. A BOK official said, "The recent issues include youth unemployment rates and discouraged job seekers," adding, "Even after the COVID-19 crisis ends, youth unemployment is likely to remain poor, raising questions about whether accommodative monetary policy should continue for this reason." The depletion of monetary policy tools is also a concern.

Therefore, it is expected that discussions with external experts will also cover what tools the BOK should have. Another challenge to resolve is the potential conflict with the BOK's other monetary policy goal, 'financial stability.' For example, if asset prices in real estate and stock markets continue to surge due to low interest rates while employment conditions remain poor, the BOK could face a situation where it cannot lower or raise interest rates.

Meanwhile, on the same day, the Economic and Fiscal Subcommittee of the Planning and Finance Committee will discuss the amendment to the Bank of Korea Act proposed by Yoon Ho-jung, a member of the Democratic Party of Korea. The core of Yoon's proposed amendment is to allow the BOK to temporarily establish an institution that supports emergency credit by purchasing bonds of for-profit companies with the approval of five or more members of the Monetary Policy Committee in the event of a national disaster.

The current Bank of Korea Act restricts transactions between the BOK and the private sector, allowing the Bank to only acquire government bonds and government-guaranteed bonds, making it difficult for the BOK to actively respond to corporate liquidity crises. This is why the government established a special purpose vehicle (SPV) under the state-run KDB Industrial Bank to purchase corporate bonds, with the BOK lending funds to this SPV to support the corporate bond market. The BOK welcomes active discussions in the National Assembly but plans to explain that the SPV has already been established and that the structure is not significantly different.