Estimating interest rate setting behaviour in Korea: a constrained ordered choices model approach |
| |
Authors: | Hyeongwoo Kim Wen Shi Kwang-Myoung Hwang |
| |
Affiliation: | 1. Department of Economics, Auburn University, Auburn, AL, USA;2. International Finance Research Team, International Department, Bank of Korea, Seoul, Korea |
| |
Abstract: | We study the Bank of Korea’s interest rate setting behaviour using an array of constrained ordered choices models, where the Monetary Policy Committee revises the target policy interest rate only when the current market interest rate deviates from the optimal rate by more than certain threshold values. Our models explain changes in the monetary policy stance well for the monthly frequency Korean data since January 2000. We find important roles for the output gap and the foreign exchange rate in understanding the Bank of Korea’s rate decision-making process. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point. We demonstrate that out-of-sample predictability improves greatly for the rate cut and the rate hike decisions using SE-adjusted inaction bands. |
| |
Keywords: | Monetary policy Bank of Korea probit model robit model logit model target RP rate interbank call rate Taylor rule |
|
|