Estimating Interest Rate Setting Behavior in Korea: An Ordered Probit Model Approach
We investigate the Bank of Korea's interest rate setting behavior using a discrete choice model, where the Monetary Policy Committee revises the target policy interest rate only when the gap between the current market interest rate and the optimal rate exceeds a certain threshold value. Using monthly frequency data since 2000, we evaluate an array of ordered probit models in terms of the in-sample fit. We find important roles for the output gap, inflation, and the won depreciation rate against the US dollar. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point, finding good out-of-sample predictability of our models.
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| Length: | |
| Date of creation: | Feb 2014 |
| Handle: | RePEc:abn:wpaper:auwp2014-02 |
| Contact details of provider: | Postal: 0326 Haley Center, Auburn University, AL 36849-5049 Phone: (334) 844-4910 Fax: (334) 844-4615 Web page: http://cla.auburn.edu/economics/ More information through EDIRC
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- Xiong, Weibo, 2012. "Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis," China Economic Review, Elsevier, vol. 23(3), pages 512-533.
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- Jahyun Koo & Ivan Paya & David A. Peel, 2012. "The Bank of Korea's nonlinear monetary policy rule," Applied Economics Letters, Taylor & Francis Journals, vol. 19(12), pages 1193-1202, August.
- Kim, Sokwon & Seo, Byeongseon, 2008. "Nonlinear Monetary Policy Reaction with Asymmetric Central Bank Preferences : Some Evidence for Korea," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 49(2), pages 91-108, December. Full references (including those not matched with items on IDEAS)
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