Author: Soohyon Kim (Chonnam National Univ.), In Do Hwang (Bank of Korea)

<Abstract>

This study examines the impact of forward guidance on short- and long-term interest rates in Korea, focusing on the effectiveness of Bank of Korea’s dot plots in shaping market expectations. Using an econometric model, we analyze how forward guidance through press conferences (communication shocks) and providing Monetary Policy Board (MPB) members’ base rates expectations (dot plots) after the MPB meetings influence various interest rates across different maturities. The results show that the dot plot shock amplifies communication effects, impacting both short-term and long-term interest rates. Notably, it has a more direct effect on bonds with maturities of three months or less, aligning with the dot plot’s targeted timeframe. In contrast, the conventional monetary policy shock is shown to influence only short-term interest rates. These findings suggest that the MPB effectively manages both short- and long-term market expectations through forward guidance while preserving flexibility for future policy adjustments.