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This paper empirically examines how the Fed responds to stock prices and inflation movements, using the forward-looking Taylor rule augmented with the stock price gap. The typical linear policy reaction function has a substantial change after 1991, but lacks the robustness in that the estimation result is sensitive to a minor change of the sample period. To alleviate the problem, we allow for temporary and permanent variations of the reaction coefficients by introducing nonlinearity and a structural break. The time variation of the inflation coefficient shows that the Fed is more aggressive in periods of inflationary pressure. However, unlike the linear model case, we find little evidence of a significant change in the Fed's active response to inflationary pressure after the structural break at around 1990. We also find a positive response to the stock price change after the break. However, its time-variation does not lead the stock price bubble, which is counter to the view that the Fed has preemptively reacted to a stock price bubble.

This paper revisits the long‐run determinants of house prices, and analyzes the house price dynamics using Korean data taking into account the close relationship between house prices and household debt. The results of cointegrating regression indicate that the major portion of the rise in house prices in Korea over the last 15 years can be explained by changes in macro variables such as household income, the demographic structure, the user cost of home ownership and the housing stock supply. The results also confirm that house prices are, indeed, closely linked to the steep increase in household debt seen over this period. Estimation of an error correction model shows that the extent of convergence of actual house prices to their long‐run equilibrium path has weakened somewhat since the global financial crisis while the speed of convergence has slowed, indicating structural changes in the Korean housing market. Finally, a forecast for house prices over the next several years suggests that they are unlikely to rise as sharply as they did in the 2000s, given the likely changes in the macro‐financial environment, and that their future path will be closely associated with that of the household debt‐to‐income ratio.

This paper revisits the issue of household debt sustainability in Korea responding to changes in U.S. interest rates. We investigate not only the transmission channels from U.S. interest rates to domestic interest rates, using the Bayesian VAR (vector autoregression) model, but also the issue of identifying households that are vulnerable in terms of their debt repayments, and we execute projections for the upcoming years given conditional forecasts and various macroeconomic scenarios. The estimation results indicate that first, the domestic policy rate will likely increase and then stagnate conditionally on the path of the U.S. policy rates. Second, the ratios of vulnerable households over total indebted households, which has been growing since 2012, will likely expand mildly over the upcoming years given an approximately 1.6%p gradual increase in interest rates and stable macroeconomic environments. Finally, however, the projected trend of domestic interest rates can cause a rapid expansion in the ratios of vulnerable households, in conjunction with a series of combined negative shocks such as highly concentrated principal repayment schedules, sharp declines in housing prices, and the occurrence of a crisis.