Reference Rates and Monetary Policy Effectiveness in Korea

Heung Soon Jung (), Dong Jin Lee (), Tae Hyo Gwon () and Se Jin Yun ()
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Heung Soon Jung: Financial Markets Department, the Bank of Korea
Dong Jin Lee: Research Department, the Bank of Korea
Tae Hyo Gwon: Financial Markets Department, the Bank of Korea
Se Jin Yun: Financial Markets Department, the Bank of Korea

No 2015-27, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper empirically examines the role of the reference rates for effective monetary policy in Korea. Desirable reference rates should have strong interconnectedness with macroeconomic variables, and be robust so that their actual paths do not deviate largely from expectations. We first compare some widely used reference rates in Korea using an impulse response analysis based upon Factor Augmented Vector Autoregression. We find that the KORIBOR delivers the largest responses to macroeconomic variables, while the differences in responses among the reference rates are moderate. To compare the robustness of the reference rates, we compute their impulse responses at multiple conditional quantile levels and examine the probability of the actual responses differing greatly from market expectations. We also find that the probability increases after an expansionary monetary policy shock, and that the KORIBOR shows relatively small increase. This implies the advantage of the KORIBOR in terms of the robustness. The bank debenture rate is shown to be most vulnerable to such a shock. Negative output and inflation shocks also give rise to increased instability due to economic downturns, and the relative performances of the reference rates are analogous to those during a case of monetary policy shock.

Keywords: Factor augmented vector autoregression; Impulse response function; Monetary policy effectiveness; Quantile impulse response; Reference rates (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 E58 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-10-28
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2015-27.pdf Working Paper, 2015 (application/pdf)

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