Author : JoonYoung Hur(Sogang University), Minsok Chae(Bank of Korea)

<Abstract>

This paper aims to study the over-time evolution of the relationship between the labor market, inflation, and monetary policy, which has been discussed in advanced economies such as the United States due to the recent coincidence of high inflation and tight labor market conditions, using Korean data. Using data from July 2009 to June 2023, we find that the impact of the vacancy rate, which captures the tightness of the labor market, on inflation has been increasing over time. We also find that the responsiveness of inflation to changes in labor market tightness is higher when inflation is high than when it is low. Finally, we find that the impact of monetary policy changes on the vacancy rate is more pronounced in the post-pandemic period. These results suggest the possibility of convexity in the relationship between the labor market and inflation in Korea. This may provide a favorable environment for the central bank to focus more on price stability, as raising interest rates when inflation is high will have a relatively larger downward effect on inflation than a reduction in the vacancy rate.