The Effect of U.S. Long-Term Interest Rates on the Term Structure of Korean Interest Rates (in Korean)

In this paper, we investigate the dynamic impact of U.S. long-term interest rate changes on the term structure of Korean interest rates. To do this, this study proposes and estimates macro-finance affine term structure models with a macroeconomic factor and regime shifts. In the model, the vector of exogenous factors consists of the U.S. long-term interest rate and three latent factors. The latent factors determine the shape of the Korean yield curve, and the U.S. interest rate can influence on the Korea yield curve through the latent factors. In addition, the possibility of structural changes in the Korean yield curve dynamics and its relationship with the U.S. interest rate are considered. Our estimation results based on an efficient Bayesian MCMC algorithm reveal that the yield curve of South Korea has experienced one-time drastic structural break in December 2008, and that after the break an unexpected positive shock on U.S. long-term interest rates induces a more substantial increase in the long-term interest rate of South Korea than before the break. Meanwhile, its impact on the Korean short-term interest rate is found to be insignificant at all times. As a result, our findings appear to support the preferred habit hypothesis. We believe that our framework will be useful for quantifying the Fed's normalizing the stance of monetary policy on the government bond markets of emerging countries.