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

Listed author(s):
  • Hyeongwoo Kim
  • Wen Shi
  • Kwang-Myoung Hwang

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.

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File URL: http://cla.auburn.edu/econwp/Archives/2015/2015-17.pdf
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Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2015-17.

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Date of creation: Nov 2015
Handle: RePEc:abn:wpaper:auwp2015-17
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Web page: http://cla.auburn.edu/economics/

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  1. Hu, Ling & Phillips, Peter C. B., 2004. "Nonstationary discrete choice," Journal of Econometrics, Elsevier, vol. 120(1), pages 103-138, May.
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