[Viewpoint] The Bank of Korea Is Not the Central Bank of Argentina

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

It was eight years ago that the establishment purpose of the Central Bank of Argentina included not only price stability and financial stability but also "employment, economic growth, and social equality." At that time, the British weekly magazine The Economist commented that "the last piece of legal independence has disappeared," and evaluated the Central Bank of Argentina as the "government's piggy bank." In the early 20th century, Argentina was considered a "country of the future," but now its economy has long since fallen into ruin. It barely survived its ninth sovereign default just a few months ago.

Discussions are currently underway in the political sphere to add employment stability to the establishment purpose of the Bank of Korea. The movement aims to strengthen the Bank of Korea's support for the real economy to alleviate employment insecurity. While the intention is understandable, from a standard perspective, this approach is extremely risky. The current amendment to the Bank of Korea Act should be reconsidered.

Monetary policy is a macroeconomic policy. Naturally, its objective function includes price stability and financial stability as well as full employment at the national economy level, sustainable economic growth, and improvement of the international balance of payments. Accordingly, monetary policy aims to achieve macroeconomic stability ultimately through controlling aggregate demand. Article 4 of the Bank of Korea Act, "Harmony with Government Policies," is in this context. Therefore, there is no need to explicitly add employment stability to the Bank of Korea's purpose clause. Adding it would rather exacerbate problems. It is highly concerning that this would fatally undermine the governance (independence and accountability) of monetary policy and impose excessive burdens on the national economy. First, let us examine the difference in policy horizons between the central bank and the government.

Today, the two major responsibilities of central banks are price stability and financial stability. Price stability remains the most effective way to achieve real objectives such as employment stability and economic growth in the medium to long term through efficient resource allocation. Financial stability is an inherent responsibility of central banks. In the late 19th century, European central banks transformed into modern central banks by acting as lenders of last resort. The Federal Reserve System, established by the U.S. Congress in 1913, was designed from the start as a financial stability authority. Since financial contracts assume the passage of time, financial stability, along with price stability, is also a medium- to long-term concept. Therefore, a medium- to long-term policy horizon is a golden rule for central banks.

On the other hand, democratically elected governments focus on a short-term horizon. They need to show economic results to the public immediately to increase their chances of re-election. Even governments advocating austerity inherently have incentives to stimulate employment and the economy. Such governments find it difficult to maintain temporal consistency in monetary policy, and policies that fail to gain market and private sector trust ultimately fail. For this reason, governments worldwide delegate monetary policy to central banks and guarantee their independence to conduct policies with a medium- to long-term horizon.

Returning to the main point, suppose the Bank of Korea takes on the purpose of employment stability. The only way the Bank of Korea can cooperate with the government for employment stability is through short-term financial support, as there are no other effective means. There is no basis for the Bank of Korea to remain independent from the government in such short-term measures. The employment stability objective will often conflict with the price stability and financial stability objectives due to differences in policy horizons. In such circumstances, it would be practically impossible for the same Bank of Korea to independently maintain the medium- to long-term horizon necessary for price and financial stability. It would also be difficult to impose clear accountability on the Bank of Korea, as it would be hard to distinguish the outcomes of measures taken separately by the government and the Bank of Korea for employment stability. Significant changes in the composition of the Monetary Policy Committee members of the Bank of Korea, the policy decision-making body, may soon occur. Ultimately, adding the employment stability objective will likely lead to the collapse of monetary policy governance and expose the Bank of Korea to the risk of comprehensive policy failure.

Recently, the Federal Reserve announced it would place greater emphasis on "maximum employment" in its monetary policy. However, the Fed itself is a policy authority heavily armed with high political capabilities. It is not an ordinary central bank that we can simply emulate. Rather, we should carefully consider the implications that the Central Bank of Argentina, burdened with employment, growth, and equality objectives in a bankrupt economy, offers us.

[Kim Hong-beom, Professor of Economics, Gyeongsang National University]