MODELING AND ANALYSIS OF YIELD CURVE AND EXCHANGE RATE FORMATION IN PRO-MARKET MONETARY OPERATIONS

Aryo Sasongko, Cicilia Anggadewi Harun, Geyana Ledy Fista, Kusfisiami Wima Mustika, Aninditha Kemala Dinianyadharani, Karanissa Larasati, Puput Kurniati and Dila Safitri
Additional contact information
Aryo Sasongko: Bank Indonesia
Cicilia Anggadewi Harun: Bank Indonesia
Geyana Ledy Fista: Bank Indonesia
Kusfisiami Wima Mustika: Bank Indonesia
Aninditha Kemala Dinianyadharani: Bank Indonesia
Karanissa Larasati: Bank Indonesia
Puput Kurniati: Bank Indonesia
Dila Safitri: Bank Indonesia

No WP/09/2024, Working Papers from Bank Indonesia

Abstract: This study examines the formation of interest rates in the government bond market and the price discovery process in the foreign exchange market through yield curve models and supply-demand curves to support pro-market monetary operations. Using the Nelson-Siegel model and its extensions, the study aims to establish more accurate yield curve parameters through conventional methods (first algorithm), determine short- and long-term interest rates (second algorithm), and ensure a positive slope for the yield curve (third algorithm). The results from the yield curve model demonstrate that this approach is effective under conditions of steepening, inverting curves, and negative interest rates. Furthermore, the creation of the supply and demand curve model and the simulation results explain the formation of foreign exchange rates and the impact of triple interventions. Foreign exchange spot transactions, domestic non-deliverable forwards, and government securities are reflected in the cleared volume indicator (µ) and the demand volume multiplier. Efforts to stabilize the market, such as central bank announcements, are reflected in the parameter σ.

Keywords: yield curve; supply-demand curve; price discovery; price formation; promarket monetary operations; exchange rate interventions (search for similar items in EconPapers)
Pages: 45 pages
Date: 2024
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