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Estimating Interest Rate Setting Behavior in Korea: A Constrained Ordered Choices Model Approach

Hyeongwoo Kim (), Wen Shi () and Kwang-Myoung Hwang

No auwp2015-17, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: We study the Bank of Korea’s interest rate setting behavior 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 standard error adjusted inaction bands.

Keywords: Monetary Policy; Bank of Korea; Probit Model; Robit Model; Logit Model; Target RP Rate; Interbank Call Rate; Taylor Rule (search for similar items in EconPapers)
JEL-codes: C51 C52 E52 E58 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Journal Article: Estimating interest rate setting behaviour in Korea: a constrained ordered choices model approach (2016) Downloads
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