Monetary Policy and Long-Term Interest Rates in Korea: A Decomposition Analysis

Sangyong Joo, Daehwan Kim and Jeffrey Nilsen
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Sangyong Joo: Monetary Policy Board, Bank of Korea, Konkuk University
Daehwan Kim: Konkuk University

Korean Economic Review, 2021, vol. 37, 327-366

Abstract: We fit an affine term structure model to Korean nominal treasury yields between 1999 and 2020 to identify four components of long-term interest rates: real short-term interest rate expectations, real term premia, inflation expectations, and inflation risk premia. We then examine how long-term interest rates and their components respond to changes in monetary policy. We find that long-term interest rates do react to monetary policy changes, but this responsiveness has weakened since the global financial crisis of 2008. The decline of the responsiveness is largely attributable to real term premia. We compare these patterns to those in the U.S. and discuss possible explanations of our findings.

Keywords: Monetary Policy; Long-term Interest Rates; Real Term Premia; Inflation Expectations; Inflation Risk Premia (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 E58 (search for similar items in EconPapers)
Date: 2021
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