[2018-12] Factors behind Synchronization of Domestic and Overseas Long-term Interest Rates and Implications

Macro Economy
Long-term Interest Rates Synchronization Quantitative Easing Global Low Growth External Soundness
Research Department(02-759-4172)

This paper examines the relationship between domestic and overseas long-term interest rates by carrying out an analysis of statistics on their correlation and principal components and on domestic-overseas interest rate differentials. According to the results of the analysis, Korea’s long-term interest rates have synchronized more with those of Germany and other advanced European countries than with those of the U.S. since the global financial crisis. Furthermore, an analysis with long-term interest rates divided into short-term interest rate expectations and term premia proves that such synchronization of interest rates has been attributable mostly to that of term premia.


The analysis points to the quantitative easing carried out by major central banks since the global financial crisis as a major cause of long-term interest rate synchronization. The results of the empirical analysis show that, as term premia in a given country declined greatly after the implementation of quantitative easing, those of Korea also decreased due to spillover effects, strengthening the synchronization of domestic and overseas term premia and long-term interests rates. The analysis results also show that global low growth and low inflation have strengthened the coupling of domestic and overseas economic conditions and inflation, contributing to long-term interest rate synchronization. Finally, improvement in Korea’s external soundness and consequent inflows of stable foreign investment funds from the public sector including governments and central banks into the Korean bond markets are seen to have caused the synchronization of Korea’s long-term interest rates mostly with those of advanced countries.


The fact that Korea’s long-term interest rates are synchronized more with those of European countries than with those of the U.S. should be interpreted as the long-term interest rates of Korea and European countries being similarly affected by changes in U.S. financial conditions, rather than as a weakened influence of such changes on the Korean financial markets. In addition, the synchronization of domestic and overseas long-term interest rates points to the need to pay more attention to the underlying trend of the long-term interest rates of advanced countries. It should be noted that if the ECB and other major country central banks commence full-scale normalization of their monetary policies, Korea’s long-term interest rates may rise, along with those of advanced countries, to a level higher than that of the present.

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