Estimating Interest Rate Setting Behavior in Korea: An Ordered Probit Model Approach

Hyeongwoo Kim ()
Authors registered in the RePEc Author Service: Wen Shi ()

No auwp2014-02, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: We investigate the Bank of Korea's interest rate setting behavior using a discrete choice model, where the Monetary Policy Committee revises the target policy interest rate only when the gap between the current market interest rate and the optimal rate exceeds a certain threshold value. Using monthly frequency data since 2000, we evaluate an array of ordered probit models in terms of the in-sample fit. We find important roles for the output gap, inflation, and the won depreciation rate against the US dollar. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point, finding good out-of-sample predictability of our models.

Keywords: Monetary Policy; Bank of Korea; Ordered Probit Model; Target RP Rate; Interbank Call Rate; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-cba, nep-dcm, nep-for, nep-mac, nep-mon and nep-sog
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