Interest Arbitrage and Interest Rates in KoreaByoung Hark Yoo ()
Economic Analysis (Quarterly), 2008, vol. 14, issue 3, 133-155 Abstract: The Bank of Korea has raised its policy rate by 1.75 %p since mid-2005 but yields on 3-year government bonds increased by just 1%p for the same period. Some argue that interest arbitrage, which happened when the covered interest rate parity condition was broken in 2006 and 2007, increased the demand for Korean bonds and, as a result, decreased interest rates. We set up a small open DSGE model and estimate it using Bayesian methods to see whether the argument is right. The estimation results show that a decrease in the risk premium in the foreign exchange market, which is a necessary condition for interest arbitrage, is significantly associated with a fall in interest rates. In addition, the link between the foreign exchange market and the domestic bond market has been more strengthened since the Asian currency crisis. Keywords: Small Open DSGE model; Interest Arbitrage; Risk Premium; Interest Rates (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:14:y:2008:i:3:p:133-155 Access Statistics for this article Economic Analysis (Quarterly) is currently edited by Wook Sohn, Hwan-koo Kang and Jaerang Lee More articles in Economic Analysis (Quarterly) from Economic Research Institute, Bank of Korea Contact information at EDIRC. |
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