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Estimation of the Term Structure of Interest Rates and Its Characteristics(Vol.8 No.2)

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Estimation of the Term Structure of Interest Rates and Its Characteristics(Vol.8 No.2)

This paper seeks to estimate the term structure of interest rates from Korean data, Monetary Stabilization Bonds and Treasury Bonds, and examine its features to see whether it can be a useful information variable for monetary policy purposes.
It was found that the implied forward interest rates derived from the estimated term structure of interest rates are informative for monetary policies in that they provide information about market expectations of future spot interest rates for, at least, a three-month horizon. Further, empirical results, based on both the implied forward rates and survey forecasts, show that imbalances between supply and demand seem to play a crucial role in determining risk premiums.
One policy implication from this paper is that employing the term structure of interest rates is, indeed, useful for conducting monetary policy. Another is that the central bank should also keep an eye on supply and demand for Treasury Bonds, such as evenly distributed periods to maturity in their issuance and government funds portfolios, as the risk premiums due to persistent imbalances between supply and demand increase the volatility of interest rates, which, in turn, constrains the effectiveness of monetary policy.

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