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Estimating Interest Rate Setting Behavior in Korea: An Ordered Probit Model Approach

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  • Hyeongwoo Kim

Abstract

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.

Suggested Citation

  • Hyeongwoo Kim, 2014. "Estimating Interest Rate Setting Behavior in Korea: An Ordered Probit Model Approach," Auburn Economics Working Paper Series auwp2014-02, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2014-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Bank of Korea; Ordered Probit Model; Target RP Rate; Interbank Call Rate; Taylor Rule;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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