The BoK has developed three monetary policy tools, to wit, the lending facility, the required reserve system, and open market operations, which have led to changes in its assets and liabilities. The BoK uses these tools to influence intermediate targets, such as the money stock and interest rates, and to achieve price stability as its final goal. It has also added to its existing toolbox a standby facility, which has gained in importance under the current interest-rate-setting monetary policy framework. This chapter looks at the main components of the assets and liabilities of the BoK, and examines its credit and monetary policy tools.

There are three key questions with regard to the exchange rate policy in Korea: (1) the determination of the appropriate level of the exchange rate; (2) the reduction of exchange-rate volatility; and (3) the connection between the interest rate and the exchange rate. Until very recently, the Korean exchange authorities put a primary emphasis on keeping the exchange rate of the Korean won at an appropriate level. Along with the liberalisation of capital flows, the priority shifted over time towards reducing excessive fluctuations of the exchange rates. Furthermore, as interest rate changes increasingly have a stronger impact on capital movement, monetary policy has also become inseparable from exchange rate policy. This chapter examines the direct and indirect foreign exchange rate policies of the Korean government and the Bank of Korea.