BOK Working Paper No.2020-29, The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility | (상세) |  Bank of Korea
Central bank: bok | Type: statement | Date: 2020-12-16

BOK Working Paper No.2020-29, The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility
2020.12.16
Monetary Policy
Credibility
Term Structure
Excess Volatility
Long-term Interest rates
Economic Research Institute(82-2-759-5452)
Attachment
BOK Working Paper N.2020-29.pdf
Title : The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility
Author : Kwangyong Park(BOK)
Long-term interest rates show considerable reactions to macroeconomic and monetary policy news. It is, however, difficult to be explained by standard rational expectations macro-finance models widely used in policy analyses. In this research, we demonstrate that private’s subjective beliefs and central bank credibility can account for the excess sensitivity of long-term interest rates using an estimated macro-finance model which incorporates private’s subjective perceptions on future real activity and inflation and endogenously evolving central bank credibility. We find that long-term rates respond stronger to macro shocks and shifts in private's perceptions regarding expected real activity and inflation when credibility is lower. In addition, the model simulation shows that 10-year yield varies substantially more when credibility is low.